Sensex Index Drops as Europe Woes, Policy Logjam Threaten Economic Growth

By Shikhar Balwani and Rajhkumar K Shaaw - Dec 9, 2011 5:39 PM GMT+0530

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India’s benchmark stock index posted its biggest two-day drop in almost three months amid concern a freeze in decision-making by the government and Europe’s debt crisis will stall growth in the South Asian nation.

Reliance Industries Ltd. (RIL), India’s largest company, tumbled 3 percent to a two-week low as Nomura Holdings Inc. downgraded the shares. Prime Minister Manmohan Singh backtracked this week on plans to allow overseas retailers including Wal-Mart Inc. (WMT) to expand in the country, undermining efforts to revive growth and deepening a yearlong paralysis in policy making. The BSE India Sensitive Index (SENSEX) has slumped 21 percent this year, faster than the 19 percent drop in the MSCI Emerging Markets Index.

“India may continue to underperform emerging markets for now because policy inaction and corruption scandals are pushing investors away,” Adrian Mowat, JPMorgan Chase & Co.’s Hong Kong-based chief Asia and emerging-market strategist, said in an interview to Bloomberg UTV today. “Growth is slowing and headline inflation” hasn’t come down as fast as expected.

The Sensex slumped 274.78, or 1.7 percent, to 16,213.46 at the 3:30 p.m. close in Mumbai, its steepest two-day loss since Sept. 23. The gauge, which lost 3.8 percent this week, rallied the most in 2 1/2 years last week on speculation the central bank may boost cash as China cut the reserve ratio for banks for the first time since 2008. As many as 26 of the 30 stocks (MXAPJ) in the measure retreated today.
Euro Concerns

Asian stocks declined for a second day, with the MSCI Asia Pacific Index (MXAP) losing 2 percent on economic reports indicating Europe’s debt crisis is contributing to slower growth in Japan, South Korea and China. Japan’s Nikkei 225 Stock Average (NKY) sank 1.5 percent after a report showed the nation’s economy grew less last quarter than the government’s initial estimate. South Korea’s Kospi Index (KOSPI) declined 2 percent after producer prices rose at the slowest pace in a year in November.

European leaders holding all-night talks in Brussels added 200 billion euros ($267 billion) to their crisis-fighting fund to halt two years of debt-driven turmoil in financial markets and dispel concerns that the 17-nation euro currency is on the brink of unraveling. Europe is India’s biggest trading partner.

The Sensex was Asia’s worst performer yesterday after Reserve Bank of India Deputy Governor Subir Gokarn said Dec. 7 the central bank won’t compromise on its fight to tame inflation to ease a cash deficit. Policy makers are concerned that adding cash by freeing up a part of the reserves held by banks will fan inflation that has stayed above 9 percent all year, even after seven interest-rate increases.
Food Prices

Still, food inflation slowed to the lowest level in more than three years in the week ended Nov. 26, the trade ministry said yesterday, giving the central bank more scope to pause rate increases when it meets Dec. 16.

The S&P CNX Nifty (NIFTY) Index on the National Stock Exchange of India Ltd. fell 1.6 percent to 4,866.7. Its December futures traded at 4,882.25. The BSE-200 Index (BSE200) lost 1.4 percent.

Reliance retreated 3 percent to 755.70 rupees, the lowest close since Nov. 25. Nomura downgraded the stock to ‘neutral’ from ‘buy’ and cut its price estimate 18 percent to 870 rupees, citing a likely slowdown in earnings.

Sterlite Industries (India) Ltd. (STLT), the biggest copper maker, slumped 3.3 percent to 101.30 rupees. Bharat Heavy Electricals Ltd. (BHEL), India’s biggest power-equipment maker, slid 3.3 percent to 263.75 rupees, extending yesterday’s 5.7 percent retreat. Bajaj Auto Ltd. (BJAUT), the second-biggest motorcycle maker, lost 3.3 percent to 1,670.35 rupees and Mahindra & Mahindra Ltd. (MM), the biggest sports-utility vehicle maker, sank 3.7 percent to 703.25 rupees.
Sensex Target

CLSA Asia-Pacific Markets yesterday reduced its 12-month Sensex target to 17,000 from 18,200, citing lower earnings and a “political logjam.” The brokerage cut its earnings estimate for Sensex companies by 3 percent to 1,269 rupees per share for the year to March 2013, joining Credit Suisse Group AG, which on Dec. 7 pared its forecast by 7 percent to 1,300 rupees.

The Sensex trades at 13.9 times future earnings, down from 21.5 times in March 2010. The MSCI Emerging Markets Index (MXEF) is valued at 9.6 times.

India’s economy grew 6.9 percent in the September quarter, the slowest pace in two years, as rising borrowing costs and accelerating inflation cooled demand. Industrial production in October may drop 0.7 percent, the first contraction since June 2009, according to the median estimate of 24 economists in a Bloomberg survey. The government will release the data Dec. 12.

Foreign funds have reduced holdings of domestic shares by $2.4 billion from a record $104.4 billion in July, contributing to the slide in stocks and the rupee, which tumbled to a record 52.73 per U.S. dollar on Nov. 22.

The currency slid 6.7 percent in November, the most since March 1992, and is heading for its second-worst year against the dollar since 1991, when Singh, then India’s finance chief, began a shift toward free-market policies.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@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.
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