Indian stocks dropped for a second day, erasing earlier gains, after steps taken by the government to arrest a slide in the rupee fell short of expectations.

State Bank of India, the nation’s largest lender, slid to a one-week low, pacing losses among its peers. Oil & Natural Gas Corp. (ONGC), the biggest explorer, declined the most since June 1. The BSE India Sensitive Index (SENSEX), or Sensex, lost 0.5 percent to 16,882.16 at close in Mumbai.

The ownership ceiling on government bonds was increased by $5 billion to $20 billion, the central bank said in an e-mailed statement today. Slowing economic growth, weak public finances, elevated consumer prices and the risk of rating downgrades have made the rupee Asia’s worst-performing major currency this year and put the Sensex on course for its first quarterly retreat since the three-month period ended in December.

“Money will come in when people find it attractive to put up capital, for which we need reforms to boost economic growth rather than measures to boost flows,” Sandip Sabharwal, chief executive officer of portfolio management services at Prabhudas Lilladher Pvt. in Mumbai, said by phone. “Markets were holding up in expectation of positive announcements on reforms. Nothing of that sort happened and the markets sold off.”

Offshore investors have cut holdings of domestic bonds by $1.2 billion from a record $31.5 billion reached on Feb. 29 and pulled out $273 million from stocks in May, a second month of net sales, as economic growth slowed to a near-decade low in the three months ended March, data from the regulator show.

Investment-Grade Rating

The withdrawals fueled the rupee’s slide this year, and the weak currency has undermined efforts by the government to limit inflation and pare the fiscal deficit. Fitch Ratings last week joined Standard & Poor’s in saying that India could lose its investment-grade status. Moody’s Investors Service today held its stable outlook, saying the slowdown in growth and investments is likely to be temporary.

Today’s measures “may only help stabilize the rupee but flows will take longer to materialize,” Aneesh Srivastava, who oversees about $470 million as chief investment officer at IDBI Federal Life Insurance Co., said by phone from Mumbai. “The measures are slightly disappointing. The market expected more.”

The rupee gained 0.2 percent to 57.0150 per dollar at the 5 p.m. close, paring an intraday gain of 1.3 percent. It fell to an all-time low of 57.3275 on June 22.

The Sensex has still risen 9 percent this year, helped by a record $8.5 billion of flows this year into stocks. The gauge trades at 13.2 times estimated earnings, near a three-year low of 12.4 times set on May 23. The MSCI Emerging Markets Index trades at 9.9 times.

‘Properly Bearish’

Finance Minister Pranab Mukherjee, the ruling Congress party’s nominee for president, will resign from his current post tomorrow and file his nomination on June 28, Congress party General Secretary Janardan Dwivedi told reporters today, without naming the successor. A group of federal and state legislators elects the next president July 19.

“Let us see what the new finance minister does and give the government a few months,” said Samir Arora, founder of Singapore-based hedge fund Helios Capital Management Pte., which focuses its investments on India, in an interview to Bloomberg UTV today. “If they don’t do anything, then we can be properly bearish.”

State Bank declined 2 percent to 2,115 rupees. ICICI Bank Ltd. fell 0.6 percent to 846.9 rupees. HDFC Bank Ltd. (HDFCB) dropped 1.4 percent to 536.7 rupees.

ONGC fell 2.5 percent to 272.6 rupees. Hero Motocorp Ltd. (HMCL), the biggest two-wheeler manufacturer, decreased the most in seven weeks, losing 2.7 percent to 2030.8 rupees.

Suzlon Energy Ltd. (SUEL), the biggest maker of wind turbines, gained 2 percent to 17.8 rupees after it agreed to sell its Chinese manufacturing arm to China Power (Tianjin) New Energy Development Co. for $60 million.

To contact the reporters on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net; Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net