Mumbai: Shares declined for the second day, closing nearly 1% lower on Wednesday, with financials leading the fall on concerns their margins could shrink in the near term. Weak world markets also kept the sentiment subdued.
Banks have been raising their deposit rates to fend off tight cash conditions, while building inflation pressure is expected to trigger a hawkish monetary stance by the central bank, a move that could douse demand for loans.
“Deposit rates are shooting up and it doesn’t look like lending rates will keep pace with them. This will impact banks’ net interest margins,” Ambareesh Baliga, vice-president of Karvy Stock Broking, said.
“Also, asset quality is a big concern. And the RBI (Reserve Bank of India) may also hike rates to contain inflation.”
The Reserve Bank of India, which had raised rates six times in 2010 before pausing in December, is widely expected to hike key rates at its policy review scheduled for 25 January.
The 30-share BSE index closed 0.96%, or 197.62 points, lower at 20,301.10 points, with 24 of its components closing in the red.
Volume was low with only 308 million shares changing hands on the BSE, where declining shares were nearly double the advancing ones.
The benchmark index climbed 17.4% in 2010, backed by record foreign fund investment of $29.3 billion.
Leading lenders State Bank of India, ICICI Bank and HDFC Bank shed between 1.3% and 3.1%.
Larsen & Toubro erased early gains and shed 2.1%. An Economic Times report said the engineering and construction conglomerate may be split into nine independent companies.
“It looks like they are planning too many divisions of L&T,” Karvy’s Baliga said. “Had it been just three-four companies, it would be a positive (stock) reaction. But with as many as nine, the long-term synergies could be an issue,’ he added.
Energy giant Reliance Industries, which has the highest weighting on the main index, slipped 0.3%.
British oil explorer Hardy Oil and Gas said it abandoned a well in its key D9 exploration licence in India, which is operated by Reliance, after failing to find gas in commercial quantities.
Bajaj Auto, the country’s second-largest motorcycle maker that also produces three-wheeled motorised rickshaws, extended losses and closed 3.7% lower after brokerage CLSA downgraded the stock to “underperform” from “outperform.”
CLSA said industry growth for motorcycles and scooters would moderate over FY12-13, while competition would intensify.
The 50-share NSE index declined 1.1% to close at 6,079.80 points.
World stocks as measured by MSCI <were down 0.5%, while its measure of emerging markets’ equities dropped 0.6%.
Metal producers dropped as base metal prices paused after a recent rally. Sterlite Industries and Tata Steel declined 1.3% and 1.9%, respectively.
Firm rubber prices weighed on tyre makers, on worries their input costs would rise. Ceat, JK Tyre and Apollo Tyres declined between 1.9% and 4.8%.
Suzlon Energy dropped 2.2% to Rs 54.45 after the main shareholder of the Indian wind turbine maker said there was “no question” of exiting the company, following media reports a rival was looking to buy a controlling stake.