Sensex drops most in two weeks on rate cut concerns

 Bloomberg/Mumbai

Indian stocks fell the most in two weeks on speculation faster inflation will limit the extent to which the central bank may ease monetary policy next week.

The S&P BSE Sensex dropped 1% to 19,362.55 at the close, its steepest slide since February 28. Volumes on the gauge were 13% less than the 30-day average. Tata Motors lost 1.2% after Jaguar Land Rover sales in China dropped 22% last month. Infosys, India’s second-largest software exporter, had the sharpest fall in three months and ICICI Bank tumbled 3.3%.

Consumer-price inflation climbed 10.9% in February from a year earlier, compared with 10.79% in January, data showed yesterday. Another report tomorrow may show that wholesale prices rose 6.6% last month, compared with 6.62% in January, according to a Bloomberg survey. Reserve Bank of India Governor Duvvuri Subbarao said last month inflation risks will affect how much he can cut borrowing costs.

A cut in borrowing costs “may not happen and hopes are going down on that side,” Prateek Agrawal, chief investment officer at ASK Investment Managers, which has Rs16bn ($295mn) under management and advisory, said in an interview to Bloomberg TV India yesterday.

Tata Motors retreated 1.2% to Rs301. Sales of Jaguar Land Rover dropped 22% last month in China, its biggest market. Maruti Suzuki India, the biggest carmaker, plunged 3% to Rs1,374.25, its fourth day of decline.

Local carmakers are bracing for the first industrywide annual sales decline, with local deliveries having fallen 4.6% to 1.71mn units in the 11 months through February, data from the producers’ group show.

“Things are slowing down and auto sales have started to reflect the mood of the population,” ASK’s Agrawal said. “After a long period of time we’re looking at negative numbers from the two-wheeler and automobiles space.”

ICICI Bank fell 3.3% to Rs1,085.7, its third day of decline. Housing Development Finance Corp, the biggest mortgage lender, dropped 1.8% to Rs809.2. All 14 lenders on the S&P BSE Bankex retreated. The measure slid 2.2%, the most since February 28.

Infosys slid 1.9% to Rs2,863.45. Aluminum maker Hindalco Industries sank 3.7% to Rs95.8.

The central bank, which last reduced the repurchase rate by 25 basis points in January, will review policy on March 19. Consumer-price inflation running at more than 10% for a third straight month in February has diminished prospects of the wholesale price index remaining below 7% last month, Tim Condon, chief Asian economist at ING Groep in Singapore, said in a report dated yesterday.

“The data point to downside risk to the consensus forecast of a cumulative 50 basis points of policy rate cuts by yearend,” he said.

The S&P CNX Nifty Index of the National Stock Exchange of India slid 1.1% to 5,851.20. India VIX, which measures the cost of protection against losses in the Nifty, surged 7.1% to 16.20.

The Sensex slumped 5.2% in February, its biggest monthly fall since May, as earnings at 43% of the index companies missed estimates in the three months through December 31, compared with 40% in the previous two quarters, data compiled by Bloomberg show. India’s economy grew 4.5% from a year ago in the final three months of 2012, the weakest pace in almost four years, government data showed on February 28.

The Sensex is valued at 13.6 times projected 12-month profits, compared with 14.3 times on January 25, when the gauge climbed to a two-year high, data compiled by Bloomberg show. That compares with the MSCI Emerging Markets Index’s 10.7 times.

Foreigners still bought a net $144mn worth of shares on March 11, taking their net investment in local equities this year to $9.3bn, a record for the period, data compiled by Bloomberg show. They bought a net $24.5bn worth of shares last year, the most among 10 Asian markets tracked by Bloomberg.

Meanwhile, India’s rupee fell from the highest level this month, on speculation importers boosted purchases of the dollar to benefit from the exchange rate.

The currency had strengthened after official data on March 11 showed exports climbed 4.2% in February from a year earlier, the first increase in 12 months. Industrial production rose 2.4% in January, a report showed Tuesday, compared with the 1.3% gain forecast in a Bloomberg survey of economists. The rupee’s advance will be limited by questions on policy makers’ ability to revive economic growth from the least in a decade, according to Barclays.

The rupee declined 0.2% to 54.3075 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 54.0175 earlier, the strongest level since February 28. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell eight basis points, or 0.08 percentage point, to 8.93%.

“Strong bids” for dollars from importers were seen once the rupee approached 54, Anindya Banerjee, a currency analyst at Kotak Securities in Mumbai, wrote in a report yesterday. “We expect a range of 54 to 54.50 over the near term, as going into the RBI meeting market anxiety remains high, especially after a high consumer price-inflation print yesterday.”

“There are no overwhelming reasons to be long on the rupee, and it is not one of our favorite currencies in the region,” said Nick Verdi, a strategist at Barclays in Singapore.

Three-month onshore rupee forwards traded at 55.42 per dollar, compared with 55.39 Tuesday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.33 versus 55.18. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.