Bloomberg News

Indian Stocks World’s Best Performers as RBI Cuts Reserve Ratio

January 24, 2012

Jan. 24 (Bloomberg) -- India’s benchmark stock index rose to become the world’s best performer this year after the central bank cut lenders’ reserve-requirement ratios for the first time since 2009 and signaled future rate cuts.

Larsen & Toubro Ltd., the largest engineering company, soared the most in 11 months. State Bank of India, the biggest lender, paced advances among its peers. Sterlite Industries (India) Ltd. and Hindalco Industries Ltd., two of the nation’s biggest metal makers, climbed at least 3 percent.

The BSE India Sensitive Index, or Sensex, jumped 1.5 percent to 16,995.77 at 3:30 p.m. in Mumbai, its highest close since Nov. 14. The measure has risen 17 percent this year in dollar terms, the most among 91 indexes tracked by Bloomberg. The BSE Bankex Index gained 3.2 percent, set for its best month since May 2009. The BSE Capital Goods Index, which slumped by half in 2011, climbed to two-month high. The BSE Realty Index rose to its highest level since Nov. 14.

“The rally may sustain because the massive gap between last year’s outperformers, like consumer goods and healthcare stocks, and underperformers, like capital goods, metals and real estate companies, has to be bridged,” Sadanand Shetty, senior fund manager at Taurus Asset Management Co., which has about $921 million in assets, said by phone from Mumbai. The cut in the reserve ratio may be followed by a reduction in interest rates in the next policy review, he said.

The Sensex plunged 25 percent last year on concern a weak rupee and seven interest-rate increases will worsen the effects of Europe’s crisis on earnings. It trades at 15 times estimated profit, down from 19.4 times at end of 2010. The MSCI Emerging Markets Index is valued at 10.1 times.

Prediction

The Reserve Bank of India reduced the cash reserve ratio to 5.5 percent from 6 percent, seeking to add about 320 billion rupees ($6 billion) into banks. The decision was predicted by three of 21 economists in a Bloomberg News survey, with two foreseeing a quarter-point cut and the rest no change.

Brazil, China and Russia have cut funding costs or reduced lenders’ reserve requirements amid Europe’s debt crisis. While India’s inflation, stoked by a falling rupee, is the fastest in the BRIC group, it eased to a two-year low last month, giving Governor Duvvuri Subbarao scope to inject cash into an economy that grew the least since 2009 in the third quarter. The RBI today lowered its growth forecast to 7 percent for the year to March from the 7.6 percent predicted in October.

“The economy would have stalled” if the central bank had not cut the reserve ratio, said Shishir Bajpai, senior vice president at Mumbai-based IIFL Wealth Management Ltd., which has $1.8 billion in stocks under management and advisory. “We will focus on distressed assets in the banking, infrastructure, capital goods and power sectors. There’s no point looking at defensives if you’re expecting the tide to turn.”

Engineering, Banking

Industrials, or companies most tied to the economy, and lenders led today’s rally, data compiled by Bloomberg show.

Larsen jumped 5.8 percent to 1,351.85 rupees, heading for its best month since May 2009 with a 36 percent rally. State Bank rose 5.2 percent to 2,040.8 rupees, its 11th day of gains. ICICI Bank Ltd., the second-biggest lender, added 3.7 percent to 888.05 rupees. Sterlite, the largest copper and zinc maker, jumped 3.1 percent to 111.2 rupees. Aluminum maker Hindalco rose 4.7 percent to 143.5 rupees. Sterlite and Hindalco were the biggest losers on the Sensex in 2011.

“This is basically a risk-rally, which means the stocks that were hammered in 2011 have made a big bounce-back,” said Taurus Asset’s Shetty.

The S&P CNX Nifty Index on the National Stock Exchange of India Ltd. gained 1.6 percent to 5,127.35. The BSE 200 Index added 1.7 percent to 2,062.34 and the BSE Mid-Cap Index climbed 1.3 percent to 5,758.14, set for the highest close since Dec. 7.

Foreign funds sold a net $2.55 million of Indian stocks yesterday, ending 14 straight days of purchases. They have still bought $1.4 billion of local equities this year, data from the regulator show. They sold $512 million of equities in 2011, compared with a record inflow of $29.4 billion in 2010.

--With assistance from Santanu Chakraborty in Mumbai and Manish Modi in New Delhi. Editor: Ravil Shirodkar

To contact the reporters on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net; Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: Richard Frost at rfrost4@bloomberg.net


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