Sensex Plunges 10% From Peak on Concern Inflation May Prompt Higher Rates

India’s stocks fell, dragging the benchmark index 10 percent below its November record, amid concern rising prices will erode profit growth and prompt the central bank to raise interest rates.

Tata Motors Ltd., the nation’s biggest truckmaker, dropped for the first time in three days. Inflation and rising commodity prices are major challenges, Finance Minister Pranab Mukherjee said today after a government report showed the pace of price increases accelerated last month. Steel Authority of India Ltd., the country’s second-largest producer, sank to its lowest level in more than 14 months after saying higher costs contributed to a 34 percent slide in quarterly net income.

“Inflation is a big concern,” said Rajat Jain, Chief Investment Officer at Principal Pnb Asset Management Co. in Mumbai, who oversees the equivalent of $1.3 billion in assets. “There could be some earnings downgrades by analysts.”

The Bombay Stock Exchange’s Sensitive Index, or Sensex, lost 322.38, or 1.7 percent, to 18,860.44 at the 3:30 p.m. in Mumbai, completing a 10 percent slide from a record close on Nov. 5. The gauge fell 4.2 percent this week, the most since May, and its 8 percent drop this year makes it the worst performer in dollar terms among the world’s 10 largest equity markets.

The S&P CNX Nifty Index on the National Stock Exchange dropped 1.7 percent to 5,654.55. The BSE 200 Index retreated 1.7 percent to 2,339.28.

Tata Motors

Tata Motors fell 4.4 percent to 1,182.4 rupees. Maruti Suzuki India Ltd., the biggest carmaker, sank 3.5 percent to 1269.7 rupees.

The benchmark wholesale-price index rose 8.43 percent in December from a year earlier after a 7.48 percent gain in November, according to a commerce ministry statement in New Delhi today.

“Investors are worried that the central bank will take strict measures as inflation continues to be out of control,” said Ranjit Kapadia, vice-president for institutional research at HDFC Securities Ltd. in Mumbai.

State Bank of India, the nation’s biggest lender, lost 2.3 percent to 2,500.8 rupees. HDFC Bank Ltd., the third-biggest, decreased 4.4 percent to 2,049.55 rupees.

The yield on the benchmark nine-year government bond has gained 28 basis points to 8.19 percent this month on speculation Reserve Bank of India Governor Duvvuri Subbarao may boost interest rates for the seventh time in a year at the next scheduled monetary policy meeting on Jan. 25.

Selling India

Global funds are poised to sell more Indian stocks than they bought this month, the first monthly foreign outflows since May. They disposed of a net 982 million rupees of the equities on Jan. 12, the sixth straight day of withdrawals, according to data on the website of the Securities and Exchange Board of India. That’s the longest string of sales since May.

Steel Authority of India, plunged 6.3 percent to 161.4 rupees, its lowest close since Nov. 4, 2009. Third-quarter profit was 11 billion rupees ($245 million), lower than the 14.1 billion-rupee average of 19 analyst estimates compiled by Bloomberg. Raw material costs rose 38 percent, while total expenses increased 30 percent, it said in a statement.

Jubilant FoodWorks Ltd., the local franchisee of Domino’s Pizza Inc., declined 5.7 percent to 562.2 rupees.

“There are inflationary pressures on labor, food items and fuel, which are putting strain on the business,” Chief Executive Officer Ajay Kaul said in an interview.

India will import onions, a key ingredient in local cuisine, and keep a ban on exports of edible oils and lentils to cool higher costs for food items, Prime Minister Manmohan Singh said yesterday.

The Reserve Bank of India, which raised rates the most in Asia in 2010, held off on boosting borrowing costs in the last policy statement on Dec. 16 as a record 1.1 trillion rupees of share sales by companies including Coal India Ltd. caused a cash squeeze at lenders.