Indian shares fell the most in more than a month on Tuesday after a higher-than-expected rate increase by the central bank stunned investors and its comments indicated the tightening cycle may not be over as yet. Investors were worried that rising borrowing costs would slow down the economic growth engine, dent corporate earnings and dampen the market outlook.
Banks and property developers led the slide after the Reserve Bank of India (RBI) raised rates by a hefty 50 basis points to fight stubbornly high inflation. It was the 11th increase in 16 months. "The RBI provided the shock-factor," said Radhika Rao, an economist with Forecast Pte. from Singapore.
"Post-decision comments signal little change in the central bank's hawkish leaning and will prod the markets to factor in more hikes before end of the year." The 30-share BSE index shed 1.87 percent or 353.07 points to 18,518.22, with 29 components losing ground. It was the biggest one-day percentage fall since June 20.
The 50-share NSE index fell 1.9 percent to 5,574.85 points. Market breadth was negative with losers beating gainers in the ratio of 2.6 to 1 on the NSE. Around 595 shares were traded, higher than the 90-day daily average volume of 578 million shares. Traders said the outlook was downbeat and the benchmark, which has fallen 9.7 percent year-to-date, would drop further.
"Clearly, we could see earnings downgrades going ahead, as the robust economic growth story is compromised and borrowing costs rise," said Ambareesh Baliga, chief operating officer at Way2Wealth Securities. Foreigners have poured in $2.8 billion in the last one month, but the inflows have been dwindling recently and they were sellers in three sessions last week.
The banking sector index and real estate sector plummeted 2.4 percent and 3.6 percent respectively. Leading lenders State Bank of India, ICICI Bank and HDFC Bank dropped between 1.4 percent and 3.3 percent, on concerns loan growth could slow down. Top-listed real estate firm dived 4.1 percent. Auto stocks were in the reverse gear. Tata Motors, Mahindra & Mahindra and Bajaj Auto fell between 1.4 percent and 4.1 percent.
Top car maker Maruti Suzuki erased early gains after it smashed estimates with an 18 percent rise in June quarter profit, and closed 0.4 percent lower. Energy major Reliance Industries shed 1.3 percent to 871.50 rupees, after its quarterly net profit lagged forecasts as slowing gas production weighed on results. "We remain concerned about E&P (exploration and production) owing to a lack of clarity on D-6 production ramp-up and slow progress in exploration acreage," Goldman Sachs said in a note.
It cut its 12-month target price on Reliance shares to 1,000 rupees from 1,070 earlier, while maintaining a 'neutral' rating. Telecom stocks dropped as investors took profits after Monday's huge gains. Bharti Airtel, Reliance Communications and Idea Cellular fell between 1.9 percent and 5.7 percent, after they had soared 5.2-15.1 percent on Monday on hopes the tariffs would improve after Bharti raised call prices in some regions.