Indian stocks retreat from two-year high on valuation concern

Bloomberg/Mumbai

India’s benchmark stock gauge fell from its highest level in more than two years as concern the rally has exceeded the outlook for earnings growth outweighed inflows from foreign funds.

The S&P BSE Sensex slid 0.3% to 20,223.98 at the close in Mumbai, erasing an intraday climb of 0.8%. The gauge has risen for five straight weeks, the longest run of gains since October. ICICI Bank, India’s largest private lender, declined 1.7%, leading financials lower. Oil & Natural Gas Corp slumped 2.4%, the most in a week.

The Sensex rebounded 11% from a seven-month low on April 9 as foreign investors extended purchases amid easing by central banks from India to Europe. The 30-stock gauge trades at 13.9 times forecast 12-month profits, near the highest level since October 6, compared with a multiple of 10.7 times for the MSCI Emerging Markets Index, data compiled by Bloomberg show.

“Valuations are expensive,” P Phani Sekhar, a fund manager at Angel Broking in Mumbai, said by phone yesterday. “We’ve seen a liquidity-driven rally. We are cautious.”

The Sensex closed on May 17 at its highest level since January 5, 2011. It has risen 4.1% this year, the most among benchmark measures in the Bric group of the largest emerging nations. Foreigners purchased a net $227mn of stocks May 16, taking their investment in local stocks this year to a net $13.4bn, a record for the period and the largest among 10 Asian markets.

ICICI Bank lost the most since May 3 to close at Rs1,209.80. The stock, which rallied 5.4% last week, was the biggest drag on the Sensex yesterday. ONGC, the nation’s largest explorer, slumped 2.4% to Rs332.70 after climbing 3.7% last week. Bharti Airtel, the nation’s largest mobile-phone operator, sank 2.5% to Rs307.80, its lowest close since April 25.

Profit at just two of the 17 Sensex companies that have reported March-quarter earnings so far has trailed estimates. That compares with about 43% that missed forecasts in the three months ended December 31, and 40% in the previous two quarters.

The wholesale-price index, a measure of inflation, rose 4.89% in April, the least in 41 months, official data showed last week. That prompted Reserve Bank of India Governor Duvvuri Subbarao to say the data will be taken into account at the June 17 policy meeting. The RBI reduced interest rates this month to 7.25% from 7.5%, joining policy makers in Australia, Europe and South Korea in cutting funding costs to support growth.

India’s record current-account gap, along with elevated consumer prices, has deterred the RBI from reducing rates at a faster pace even as growth in Asia’s third-largest economy slowed to a decade-low of 5% in the year ended March, according to an estimate from the government.

The 50-stock CNX Nifty Index on the National Stock Exchange of India lost 0.5% to 6,156.90, while its May futures traded at 6,173.80.

Meanwhile, India’s rupee fell to an 11-week low on speculation importers stepped up dollar purchases to pay month-end bills.

The currency extended this month’s loss to 2.4% as some companies repaid or refinanced overseas loans raised around the start of the last fiscal year, which began in April 2012, according to Andhra Bank. The Dollar Index, which tracks the greenback against six major counterparts, rose more than 1% in each of the last two weeks on bets the Federal Reserve will slow asset purchases, which have fuelled fund flows into emerging markets, on signs the US economy is improving.

The rupee declined 0.4% to 55.1150 per dollar in Mumbai, according to data compiled by Bloomberg. The currency touched 55.1350 earlier, its weakest since March 4. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose one basis point, or 0.01 percentage point, to 8.48%.

“Both importers and exporters” were in the market today, said Vikas Babu, a foreign-exchange trader in Mumbai at state- run Andhra Bank. “Investors will be awaiting Bernanke’s testimony this week” for signals on the prospects of US stimulus policies, he said.

The Fed is buying $85bn a month of Treasury and mortgage bonds to push down borrowing costs and spur growth. Fed Chairman Ben Bernanke is scheduled to speak to the Joint Economic Committee of Congress on May 22. Minutes of the Fed’s last policy meeting will be released the same day.

Three-month onshore rupee forwards traded at 56.04 per dollar, compared with 55.79 on May 17. Offshore non-deliverable contracts were at 55.88 versus 55.94.