India’s benchmark stock index fell to a three-week low as cigarette makers declined on concern they will be taxed higher than the proposed national sales tax.
ITC, the largest tobacco company with the fourth- highest weighting on the S&P BSE Sensex index, was the biggest decliner on the 30-stock gauge. Rival Godfrey Phillips India Ltd capped its steepest two-day decline since February, while VST Industries, which makes the Charminar brand of cigarettes, tumbled the most since August. Coal India, the world’s largest producer of the fuel, retreated to a one-month low.
The S&P BSE Sensex decreased 0.4% to 25,530.11, the lowest close since November 18. A government panel after markets hours Friday proposed an unified sales tax in the 16.9 to 18.9% range, a level that may help Prime Minister Narendra Modi win over opponents and push through one of India’s biggest economic reforms since the early 1990s. The panel recommended a “sin, demerit rate” of about 40% on luxury cars and tobacco products.
“Tobacco companies are leading the decline as there is fear that they will be charged higher than the proposed goods-and- services tax rate,” Shishir Bajpai, a director at IIFL Wealth Management Ltd, which has $12bn under management and advisory, said by phone. “The market is awaiting the fate of the GST bill, and the Fed’s rate liftoff.”
Cigarette makers’ tax rate may increase as much as 14% if demerit rate is levied in addition to central excise tax, Morgan Stanley said in an investor note.
Economic data in the US has raised hopes of a rate increase by the Fed this month. A report on Friday showed a 211,000 increase in November US payrolls, following a 298,000 gain a month earlier that was bigger than previously estimated. The jobless rate held at 5%, a more than seven-year low.
A healthy rate of hiring has raised the odds that Fed officials will boost rates this month for the first time since 2006 to 76%, denting the allure of riskier assets. Foreign investors sold a net $269.9mn of Indian stocks on December 4, paring this year’s inflows to $2.9bn. They withdrew $1.1bn from local equities in November.
ITC plunged 6.7%, the most since Feb. 28. Godfrey Phillips decreased 5% after slumping 4% on Friday. VST Industries slid 2.8%. Coal India fell 2.3%. Oil & Natural Gas Corp slipped 1.5% in a third day of decline.
The Sensex has fallen 7.2% this year and trades at 15.1 times projected 12-month earnings. The MSCI Emerging Markets Index is valued at a multiple of 11.2.
Meanwhile the rupee fell 0.1% to 66. 7350 a dollar, prices from local banks compiled by Bloomberg show. It fell 2.1% last month in Asia’s worst performance as foreign holdings of rupee bonds fell by the most since May.
India’s 10-year bonds rose on speculation purchases of sovereign debt by the central bank on Monday will be the first of many as it seeks to boost the supply of cash in the financial system.
The Reserve Bank of India bought Rs100bn ($1.5bn) of government notes in its first open-market purchase since January 2014. Bank of America Merrill Lynch and Nomura Holdings predict more such operations as a shortage of funds at banks and outflows of foreign money from local debt threaten to drive borrowing costs higher.
“The RBI’s bond-buying plan is supporting sentiment,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts in New Delhi. “Investors will keenly be watching if there are more such purchases.”
The yield on bonds due May 2025 fell one basis point to 7.75% in Mumbai, according to prices from the central bank’s trading system. The rate dropped to as low as 7.73% in the intraday trading. Bonds pared gains as the central bank bought most of notes in the shorter maturities, according to DCB Bank.
The Reserve Bank bought Rs62.09bn of 7.83% bonds maturing in 2018, while it purchased Rs24.90bn of notes due in 2019, according to a central bank statement. It bought Rs13.01bn of bonds due in 2024 and didn’t accept any bids for securities maturing in 2030.
Primary dealers had to rescue a sale of government notes on Friday by picking up unsold debt, fuelling speculation investors demanded higher yields.
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