India’s rupee fell the most since August, while stocks and bonds retreated, on concern an election defeat for Prime Minister Narendra Modi’s party in the country’s third- most-populous state will hamper his ability to push through policies to strengthen the economy.
The rupee declined 1% to 66.4475 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. The S&P BSE Sensex index dropped 0.6% to its lowest close since September 29. The yield on India’s 10-year government bonds rose four basis points to 7.73%, the highest since September 28, according to prices from the Reserve Bank of India’s trading system.
The election outcome will embolden Modi’s opponents who have sought to block key economic reforms while portraying his government as intolerant of religious minorities. Sunday’s results in Bihar also show Modi can’t bank on winning control of the upper house of the federal legislature, where lawmakers appointed by India’s 29 states have blocked measures including a national sales tax.
Speculation the US will increase interest rates as soon as next month also weighed on India’s financial markets.
“The unfavourable poll results, coupled with renewed US rate-hike expectations, will keep local markets on tenterhooks,” said Radhika Rao, an economist at DBS Bank in Singapore. “Worries are that these election results might derail the reform process and tilt the balance away from developmental reforms and encourage a populist agenda.”
Sun Pharmaceutical Industries, India’s most valuable drugmaker, lost 5.8% and was the biggest percentage decliner on the 30-stockSensex after its second-quarter net income slumped 41%. Larsen & Toubro, the nation’s largest engineering company, dropped to its lowest level since May 2014. ICICI Bank and HDFC Bank, the top two private lenders by assets, slid 1.5%.
Odds that the Federal Reserve will increase borrowing costs at its December meeting rose to 68% on Friday, up from 56% Thursday, after the US reported the biggest monthly surge in payrolls this year.
Higher US rates are expected to attract money away from developing markets as the dollar strengthens.
Modi’s opponents, a three-party alliance led by Bihar’s incumbent Chief Minister Nitish Kumar, won 73% of seats in the 243-member state legislature, compared with 24% for BJP. The defeat followed a loss for the BJP in Delhi elections earlier this year.
“The legislative reforms agenda of the government would take a backseat,” Aneesh Srivastava, who manages $700mn as chief investment officer at IDBI Federal Life Insurance Co, said by phone.
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