Mumbai: Indian shares extended losses for the third straight day, and closed down 0.4% to their lowest close in over six weeks, as most banks fell after the central bank asked them to raise the provision cover for bad debts.
Sentiment was also hurt by weakness in world stocks which slid as data showed US consumer confidence deteriorated, deepening worries over the pace of an economic rebound. Banks extended losses on concerns their profit would be hit after the Reserve Bank of India on Tuesday asked banks to increase the minimum provision ratio for bad debts to 70% by September 2010.
Brokerage Prabhudas Lilladher said the 70% provision coverage is on the higher side and will impact sustainable return on equities for banks.
“These banks (State Bank of India, ICICI Bank and Canara Bank) are likely to witness a significant decline in profitability over the next four quarters to accommodate the higher provisioning requirement,” Standard Chartered said in a note.
The 30-share BSE Index closed 0.43% or 69.91 points lower at 16,283.49. Nineteen of its components closed in the red. The 50-share NSE index closed 0.42% lower at 4,826.15.
“Market will stay volatile ahead of derivatives (monthly contracts) expiry tomorrow,” said Amitabh Chakraborty, head of equities at Religare Capital, adding he expects Nifty to test 4,700 in the very short term.
The Sensex has risen nearly 69% so far this year, but has shed nearly 5 percent so far this month.
“Our prognosis is that Indian equities could be volatile in the near term, since a lot of the next six months’ projected growth is already in the price,” Morgan Stanley said in a note.
“We believe that investors should use such volatility to buy Indian shares, since the growth outlook for the next 12-18 months remains firm and is still not priced into equities,” Morgan Stanley added.
Private lender ICICI Bank tumbled 3.1% to Rs810.20 while rival HDFC Bank lost 3.1% to Rs1,618.90.
Top lender State Bank of India erased early losses and closed 0.7% higher on buying by select funds and short-covering, dealers said.
The stock had fallen as much as 3.9 percent in early trade.
“Interest rate sensitives such as real estate and banks will reel under pressure for a while, with RBI signalling an exit from the accommodating policy,” added Chakraborty.
Energy giant Reliance Industries, which has the highest weight on Sensex, rose 2.3 percent to Rs2,035.65, after government allocated an additional 50 million cubic metres a day (mmscmd) of gas from the company’s east coast block D6.
Export-focussed software services closed higher after Wipro’s robust outlook fuelled optimism a recovery is well underway as overseas clients boost orders.
Sector leader Tata Consultancy firmed 0.2% to Rs642.40. Infosys climbed 0.6%, while Wipro gained 3.2%.
The world’s eighth-largest steel maker Tata Steel closed 3.7% lower at Rs482.60,after it posted a bigger-than-expected fall in its quarterly net profit.
“Valuation looks expensive coupled with structural demand concerns in the European market and poor returns on a long term basis,” brokerage Prabhudas Lilladher said in a note, while maintaining ‘reduce´ rating on the stock.
Drug maker Sun Pharmaceutical climbed 0.9% after its September quarter net profit posted a smaller-than-expected fall.
Top mobile operator Bharti Airtel firmed 3.4% as some investors bet its price had fallen to attractive levels, after the stock shed around 24 percent this month, dealers said.
In the broader market, losers outpaced gainers in the ratio of 1.5:1 in a moderate volume of 395 million shares.