Mumbai: Indian stocks dropped on concern that surging oil prices amid instability in the Middle East and North Africa will fan inflation and prompt further increases in interest rates in the South Asian nation.
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Hero Honda Motors Ltd, the country’s biggest motorcycle maker, sank to its lowest in 18 months. HDFC Bank Ltd, the second largest private lender, lost 2.9%. Oil jumped to the highest in more than two years as violence escalated in Libya, stoking concern that crude supplies will be disrupted. Reliance Industries Ltd, the largest company by market value, surged 3% after agreeing to sell stakes in 23 oil areas to BP Plc.
The oil rally can lead to price rises and will make controlling inflation tougher, said D.K. Aggarwal, who manages about $100 million (Rs452 crore) as chairman of SMC Wealth Management Services Ltd in New Delhi. Some investors would like to book profits as the outlook is unclear.
The Bombay Stock Exchange’s (BSE) sensitive index, or Sensex, lost 142.15 points, or 0.8%, to 18,296.16. The S&P CNX Nifty on the National Stock Exchange dropped 0.9% to 5,469.20. The BSE 200 Index retreated 0.9% to 2,243.93.
Hero Honda lost 3.4% to Rs1,390.55, its lowest close since August 2009. HDFC Bank led declines among financial companies, dropping 2.9% to Rs2,138.45, its biggest decline in more than three weeks.
The Sensex has lost 11% this year, making it the world’s third worst-performing benchmark index after Egypt and Tunisia in local currency terms, amid concern that government measures to quell inflation will hurt economic growth.
Last year, India’s gauge climbed 17%, adding to the 81% surge in 2009. Since reaching a record on 5 November, the index has slumped 13%, exceeding the 10% drop that’s termed a so-called correction by some investors. Companies on the measure are valued at an average of 17.2 times estimated earnings, down from last year’s high of about 21.5 times in March, according to data compiled by Bloomberg.
New York oil futures for March delivery rose as much as 9.6%, while London-traded Brent surged to the highest since September 2008, as soldiers deserted Libyan leader Moammar Gadhafi’s government and diplomats resigned.
India meets about three-quarters of its annual energy needs from imports and is bracing for the impact of higher fuel costs on inflation, currently stoked mainly by food costs.
Protracted Middle East unrest will have implications for oil prices, flagging a fresh inflation risk, central bank governor D. Subbarao said on 10 February.
BNP Paribas SA last week cut its rating for the nation’s stock market to underweight from neutral, citing a rise in inflationary pressures and the outlook for fund flows and earnings.
Reliance Industries advanced 3% to Rs984.85, its steepest climb since 10 December. BP agreed to pay $7.2 billion for stakes in 23 blocks in India from Reliance. It will acquire a 30% interest in the blocks as well as form a venture with Reliance to market gas, the London-based company said in a statement on Monday.
Reliance’s stock was on Tuesday upgraded to buy from hold at Antique Stock Broking Ltd following the agreement.
“We believe that this deal could help Reliance to establish its exploration and production business valuations,” analysts led by Amit Rustagi wrote in a note to clients. Further, accelerated development of existing blocks, higher recovery rates and access to deepwater technology will help in creating long-term value for shareholders.
The brokerage said it raised its price estimate for Reliance to Rs1,102 per share after incorporating additional exploration upside of Rs49 per share, based on the transaction value.
Overseas funds bought a net Rs245 crore of Indian equities on 18 February, paring total outflows from equities this year to Rs6,660 crore, according to data on the website of stock market regulator, the Securities and Exchange Board of India.
Graphic by Paras Jain/Mint