Indian stocks dropped the most in two weeks after retail inflation quickened more than estimated in April, raising concerns about the central bank’s ability to cut interest rates further.
Adani Ports & Special Economic Zone was the worst performer in the S&P BSE Sensex. Hindustan Unilever, the nation’s largest home-products company, slid to a two-month low. Bharti Airtel dropped to a one-week low, while Dr Reddy’s Laboratories fell for a third time this week. ICICI Bank and Tata Steel lost at least 2.4%.
The Sensex decreased 1.2%, the most since April 28. The index rose the most in two weeks on Thursday before official data released after trading ended showed consumer prices rose 5.39% in April from a year ago after a 4.83% climb in March. The median of 35 estimates in a Bloomberg survey had forecast a 5.05% increase.
“Disappointing inflation number may limit the Reserve Bank of India’s room to cut rates further,” Rajendra Wadher, a director at PRB Securities, said by phone from Mumbai. “Company earnings are recovering but valuations have factored in most of the upside.”
Reserve Bank of India governor Raghuram Rajan wants to limit price gains to 5% by March 2017 as he looks to the performance of the June-September monsoon rainfall to determine whether there’s scope to add to five interest-rate cuts since early 2015. The Sensex posted its best week in a month amid optimism corporate earnings in the world’s fastest-growing major economy are recovering after the worst run since the global financial crisis. Eight out of 15 Sensex companies that have posted March- quarter results so far beat or matched estimates.
Investors have also been drawing comfort from this year’s prediction for above-normal rainfall after back-to-back deficits and the passage of key economic bills in parliament. Lawmakers passed a bill on Wednesday to overhaul archaic insolvency laws, taking Prime Minister Narendra Modi closer to fulfilling his pledge to make it easier to do business in the country.
“The quarterly results, the monsoon forecast and the fair amount of reforms passed in parliament despite the opposition have been factored in,” Sanjeev Prasad, co-head and senior executive director at Kotak Institutional Equities in Singapore, said in an interview with Bloomberg TV India on Friday. “India actually looks fine, barring the valuation.”
The Sensex trades at 15.7 times 12-month projected earnings, higher than the five-year mean of 14.3 times. The MSCI Emerging Markets Index is valued at a multiple of 11.3. Foreign investors sold $49mn of local stocks on May 11, taking this year’s inflows to $1.8bn. They invested $585mn last month after an inflow of $4.1bn in March, which was the highest in three years.
Meanwhile, extending its losses for the second straight session, the rupee yesterday fell by another 15 paise to 66.77 a dollar on sustained demand for the US currency from banks and importers on the back of higher greenback overseas amidst sharp fall in domestic equities. The rupee resumed lower at 66.78 per dollar as against the Thursday’s closing level of 66.62 at the Interbank Foreign Exchange market and moved down further to 66.83 before finishing at 66.77, showing a loss of 15 paise or 0.23.