Bloomberg News

Indian Stocks Retreat as Growth Data Dims Rate-Cut Expectations

August 31, 2012

Indian stocks declined, paring a monthly gain, on concern faster-than-expected economic growth may dissuade the central bank from cutting the highest interest rates in the region.

The BSE India Sensitive Index (SENSEX) retreated 0.9 percent to 17,380.75 at the close in Mumbai, trimming the monthly gain to 0.8 percent. The gauge dropped 2.3 percent this week, ending a four-week advance. Hindustan Unilever Ltd. (HUVR), the biggest home products maker, ITC Ltd. (ITC), the largest cigarette company, and Tata Consultancy Services Ltd. (TCS), the top software exporter, dropped from record highs.

Gross domestic product expanded 5.5 percent in the June quarter, beating the 5.2 percent gain estimated in a Bloomberg survey of 39 analysts. The data may fail to ease pressure on Prime Minister Manmohan Singh to revive a development agenda hampered by graft allegations and political gridlock, as price pressures keep the central bank from paring rates further.

“The RBI will argue high rates have not impacted growth and that the government has to get inflation under control,” Andrew Holland, chief executive officer of investment advisory at Ambit Capital in Mumbai, said by e-mail. “Stocks will head down and look at what happens globally in the next few weeks.”

Policy makers must reduce the inflation rate by about 2 percentage points, RBI Governor Duvvuri Subbarao said Aug. 27. Inflation has averaged more than 7 percent in 2012, fanned by food costs and a 17 percent decline in the rupee against the dollar in the past year that made imports such as oil costlier. A below-average monsoon threatens to exacerbate price increases and weigh on growth by crimping farm output.

‘Outlier’

The wholesale-price index rose 6.87 percent last month from a year earlier, the fastest inflation in the BRIC group, even as the pace eased to a 32-month low. India also faces record borrowing needs to plug the widest BRIC budget deficit and a trade shortfall that has pressured the rupee.

India is “somewhat of an outlier in the world” as price increases remain above a comfort level of about 5 percent even as economic growth cools, according to Governor Subbarao. He left borrowing costs unchanged at 8 percent in July for a second meeting, after a 0.5 percentage point cut on April 17.

The main opposition party stalled parliament for an eighth day today, demanding the prime minister to quit after the chief auditor Aug. 17 found the government may have lost $33 billion awarding coalfields without holding auctions. The government was relying upon the parliamentary session to end two years of policy gridlock to stoke economic growth from the slowest pace in three years.

Foreign Flows

BNP Paribas SA cut its rating on Indian stocks to neutral from overweight in a report Aug. 27 on concerns that persistent inflation and policy deadlock will hurt growth until a new government is formed in 2014.

The Sensex has still gained 12.5 percent this year, helped by the biggest overseas equity flows among 10 Asian markets tracked by Bloomberg. Foreign funds bought a net $449.5 million of stocks yesterday, the 23rd straight day of purchases, taking their investments this year to $12.3 billion, according to data from the regulator. That’s the longest stretch of net buying since a record 41-day streak through Oct. 27, 2010, according to data compiled by Bloomberg.

The Sensex trades at 13.7 times estimated earnings, compared with the MSCI Emerging Markets Index’s 10.7 times.

India VIX, which measures the cost of protection against losses in the S&P CNX Nifty Index, surged 3.8 percent to 17.30. The Nifty index lost 1.1 percent to 5,258.50 and its September futures settled at 5,291.65. The BSE-200 Index lost 0.6 percent to 2,134.32. India’s top two bourses traded 1 billion shares yesterday, the highest since July 26 and 17 percent more than the 12-month daily average of 888 million.

Hindustan Unilever slid 2.6 percent to 515.1 rupees. ITC lost 1.1 percent to 267.65 rupees, ending a seven-day rally. Tata Consultancy Services fell 1.7 percent to 1,343.75.

NTPC dropped 2 percent to 168.05 rupees. The company cut its investment plan to 500 billion rupees in a five-year period ending 2017 compared with 2 trillion rupees earlier, Business Standard reported, citing a company official it didn’t identify.

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

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


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