Sensex falls 0.7% on rate jitters

Sensex falls 0.7% on rate jitters

New Delhi: Indian shares dropped for the sixth straight session on Monday, with banking stocks leading the losses, as investors braced for another round of interest rate hike at the central bank’s annual policy statement on Tuesday.

State Bank of India (SBI) fell 4% as Morgan Stanley downgraded it along with some other state-run banks, citing pressure on the lenders’ net interest margins.

Shares in Infosys Technologies Ltd closed 0.6% higher, after the country’s second largest software services exporter announced top-level management changes linked to the pending retirement of its chairman, which analysts said removed uncertainties around the succession plan.

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“The mood is very cautious," said Rajesh Agarwal, head of research at Eastern Financiers Ltd, referring to the Reserve Bank of India’s (RBI) meeting. “What happens in the market in next four-six weeks will be determined on Tuesday."

RBI on Monday warned that persistently high inflation poses a risk to sustaining growth, reinforcing expectations that it will lift interest rates by at least 25 basis points on Tuesday.

“If it is only 25 basis points, (it is) already discounted by the market. If it is something more than that, that would be negative for the markets," Agarwal said.

The 30-share Bombay Stock Exchange (BSE) index closed 0.72%, or 137.94 points, lower at 18,998.02, with 22 of its components closing in the red. The 50-share National Stock Exchange (NSE) index fell 0.84% to 5,701.30.

The Sensex has fallen in three of the past four months this year and is down 7.4% on the year. It fell 1.6% in April.

Headline inflation in India surged to nearly 9% in March, far above forecasts, adding pressure on RBI to further tighten policy.

India’s manufacturing sector maintained its strong rate of expansion in April, helped by higher output and employment, a survey showed on Monday, reinforcing expectations for more rate increases.

Shares in Canara Bank and Punjab National Bank dropped 5.2% and 2.8%, respectively. The banking sector index closed 2.1% lower.

“There is some nervousness in the markets ahead of the rate decision. People are getting worried about the net interest rates and asset quality of the banks," said Neeraj Dewan, director of Quantum Securities Ltd.

Infosys gained 16.3 to close at 2,922.55. Goldman Sachs said in a research note the uncertainty surrounding the management restructuring at Infosys was over, with the management now increasing its focus on executing the new strategy.

Shares in Maruti Suzuki India Ltd slid 2% to 1,291.60, after the company posted its slowest pace of monthly sales growth in more than a year as rising interest rates dampened consumer demand.

Automobile sales growth in India is expected to slow to 12-15% this fiscal, data from Society of Indian Automobile Manufacturers, a trade body showed. Auto sales grew a record 30% in 2010-11 to 1.98 million units.

Reliance Industries Ltd, the country’s most valuable private firm and the heaviest stock in the main index, fell 1.9% to 964.75.

In the broader market, there were more than two losers for every gainer, with about 488 million shares traded on NSE.

The killing of Al Qaida leader Osama bin Laden by US forces prompted investors on Monday to strip some of the risk premium underpinning world asset prices, lifting the dollar, boosting stocks and weakening commodities.

The MSCI’s measure of Asian markets other than Japan rose 0.35%, while world equities as measured by the MSCI index were up 0.23% by 1130 GMT. Some Asian markets were closed for a holiday.


Graphic by Yogesh Kumar/ Mint