Indian stocks dropped for the first time in three days after data showed inflation quickened faster than estimated in May and as a downgrade in Spain and Cyprus’ credit ratings threatened to deepen Europe’s debt crisis.
Larsen & Toubro Ltd. (LT), the nation’s largest engineering company, tumbled 3.9 percent, ending a two-day advance. The benchmark wholesale-price index climbed 7.55 percent, after rising 7.23 percent in April, the government said today. The median of 37 estimates in a Bloomberg News survey was for a 7.5 percent gain. ICICI Bank Ltd. (ICICIBC), the second-largest lender, retreated 3.3 percent, pacing losses among peers.
The BSE India Sensitive Index (SENSEX), or Sensex, lost 1.2 percent to 16,672.39, according to preliminary closing prices. Asian and European stocks declined as Moody’s Investors Service cut Spain’s rating by three steps late yesterday, citing increased debt burden and weakening economy.
“While inflation exceeded expectations, weakness in global markets is also keeping investors jittery,” Sandip Sabharwal, head of portfolio management services at Prabhudas Lilladher in Mumbai, said by phone.
Moody’s also lowered Cyprus’s bond rating to Ba3 from Ba1, attributing the downgrade to the increased likelihood of Greece leaving the euro area. The country’s government may have to give more support to Cypriot banks as a consequence.
Policy makers globally are being pressed into action to boost the global economy that is suffering its worst slowdown since the recession ended in 2009. On the heels of a June 5 interest-rate cut by Australia, China two days later unveiled its first reduction in borrowing costs in more than three years.
India’s economic growth in the first quarter was the weakest in almost a decade as a policy paralysis in the ruling coalition undermined Prime Minister Manmohan Singh’s efforts to revitalize the economy and the debt crisis in Europe, India’s top trading partner, crimped exports.
“Growth numbers are overshadowing inflation data and in a scenario where government policy isn’t spurring expansion, the RBI has to take steps to boost growth,” said Sabharwal.
Data earlier this week showed India’s factory output expanded less than analysts estimated in April, adding to the case for a cut in interest rates. The Reserve Bank of India may lower its benchmark rate to 7.75 percent from 8 percent at its June 18 review, according to 17 of 23 economists surveyed by Bloomberg News. Two expect a cut to 7.5 percent, while the rest predict no change.
The Sensex rallied 4.7 percent last week, its best weekly advance this year, amid speculation of a rate cut. The 30-stock gauge has climbed 8.2 percent this year and trades at 13.1 times estimated earnings, near the lowest in more than three years. The MSCI Emerging Markets Index trades at 9.9 times.
Larsen tumbled 3.9 percent to 1,296.90 rupees, poised for the steepest decline since May 4. ICICI Bank retreated 3.3 percent to 821.65 rupees while larger rival State Bank of India declined 3 percent to 2,158.8 rupees.
India VIX, which measures the cost of protection against losses in the S&P CNX Nifty Index, jumped 5 percent to 25.57. The Nifty fell 1.1 percent to 5,063.65 and the BSE-200 Index (BSE200) lost 1.1 percent to 2,049.03. Combined trading volume on India’s top two exchanges was 810.99 million shares yesterday, compared with a 12-month daily average of 906.87 million.
Overseas investors were net buyers of local shares for a fifth day on June 12, purchasing a net $4.25 million of stocks and taking their total investment this year to $8.51 billion, data from the regulator show. Foreigners had cut holdings by $273 million in May, a second straight month of net sales.
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