Indian stocks ended five days of gains and the rupee weakened as Standard & Poor’s warned the country could lose its investment-grade rating due to slowing growth and political roadblocks to economic policy-making. Bonds gained.
Larsen & Toubro Ltd. (LT), the biggest engineering company, lost 2 percent, the most since June 1. India could become the first BRIC nation to lose the rating, the rating agency said in a statement. Tata Motors Ltd. (TTMT) lost 1.6 percent, pacing losses among four-wheeler makers on concern car sales may slow.
The BSE India Sensitive Index (SENSEX), or Sensex, lost 0.3 percent to 16,668.01 at close in Mumbai, reversing an intraday gain of 1.1 percent. The rupee weakened 0.5 percent to 55.73 a dollar, the lowest level since June 8. The Sensex had the year’s best weekly advance last week on speculation the central bank will join regional policy makers in cutting rates to revive growth.
“S&P’s comments proved to be a sentiment spoiler,” said Aneesh Srivastava, who oversees about $470 million in assets as chief investment officer at IDBI Federal Life Insurance Co. in Mumbai. “S&P has reiterated the points it made in April. The market will look beyond this day and focus on the situation in Europe and domestic economic data due in the next few days.”
India’s gross domestic product expanded 5.3 percent in the March quarter from a year ago, the weakest pace in nine years, stoking concern the nation’s economic outlook has deteriorated as policy stalemate deters investment and Europe’s debt crisis crimps exports. S&P cut the nation’s credit outlook to negative from stable in April, dealing a further blow to Prime Minister Manmohan Singh’s development agenda.
Singh’s efforts to allow greater investments from overseas insurers, pension funds and retailers in the past year have been rejected by his coalition allies, dampening investments.
“Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” Joydeep Mukherji, an analyst at S&P in New York, said in the statement.
The agency’s long-term sovereign credit rating on India is BBB-, one level above speculative grade. Aside from India, the BRIC group also includes Brazil, Russia and China.
The Sensex rose as much as 1.1 earlier today amid optimism the Reserve Bank of India would cut rates at a policy meeting on June 18 and as Asian stocks rallied after China’s trade data beat estimates and Spain sought a bailout for its banks, a sign Europe is tackling a crisis that has roiled global markets.
The economic slowdown, coupled with a drop in oil prices, suggest more room for rate cuts even as inflation risks remain, RBI Deputy Governor Subir Gokarn said June 1 and reiterated his position on June 4.
The yield on the benchmark bonds maturing in 2021 fell to a three-month low as debt purchases and speculation borrowing costs will be cut buoyed demand.
The Reserve Bank of India will buy a maximum of 120 billion rupees of notes at an auction tomorrow, according to a statement from the monetary authority. The RBI has already bought 321 billion rupees of bonds this fiscal year that began April 1.
The yield on the government’s 8.79 percent bonds due November 2021 fell three basis points, or 0.03 percentage point, to 8.33 percent in Mumbai, according to the central bank’s trading system. That was the lowest level since March 14.
The RBI cut borrowing costs on April 17 for the first time in three years after increasing them a record 13 times from mid- March 2010 to October last year to cool consumer prices, which averaged 9.5 percent in 2011.
India’s factory output probably grew 1.7 percent in April, compared with a decline of 3.5 percent in March, according to the median estimate of 31 economists in a Bloomberg survey. The government will release the data tomorrow.
Inflation may have accelerated for a second month to 7.5 percent in May, from 7.23 percent in April, according to the median estimate of 31 analysts in a Bloomberg survey. The data will be published on June 14.
The rupee dropped 0.5 percent after earlier rising as much as 0.7 percent. The currency fell to 55.82 intraday, the lowest level since June 5.
“Investors have taken this explicit statement quite negatively and we could see further weakness from here unless we have appropriate responses from the authorities,” said Ravi Ranjit, chief manager at Federal Bank Ltd. in Mumbai.
The 30-stock Sensex has advanced 7.9 percent this year and trades at 13 times estimated earnings, near the lowest in more than three years, according to data compiled by Bloomberg. That compares with the MSCI Emerging Markets Index’s 9.9 times.
India VIX, which measures the cost of protection against losses in the S&P CNX Nifty Index, surged 6.6 percent to 25.02, the most since May 23. The Nifty slid 0.3 percent to 5,054.10 while its June futures settled at 5,052.60. The BSE-200 Index (BSE200) lost 0.4 percent to 2,046.49.
Larsen slumped 2 percent to 1,283.25 rupees, the most since June 1 and Bharat Heavy Electricals Ltd. (BHEL), India’s largest power- equipment maker, tumbled 2.4 percent to 215.9 rupees.
Tata Motors, the owner of luxury brands Jaguar Land Rover, dropped 1.6 percent to 235.5 rupees. Maruti Suzuki India Ltd. (MSIL), the biggest carmaker, fell 1.2 percent to 1,110.5 rupees.
India’s automakers group may cut its annual sales forecast at a review next month after passenger car sales growth slowed in May as gasoline prices rose to a record and borrowing costs remained high.
“Demand for cars may move into negative territory because the overall market sentiment is very negative,” Vishnu Mathur, director general of the Society of Indian Automobile Manufacturers, told reporters in New Delhi. “Interest rates aren’t going down as quickly as we expected and petrol prices have gone up tremendously.”
Overseas investors were net buyers of local shares on June 8, purchasing a net $51 million of stocks, data from the market regulator show. Foreigners cut holdings by $273 million in May, a second month of net sales.
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