Sensex Index Retreats as Oil Rallies, Coalition Partner Threatens to Quit

Indian Stocks Fall on Oil Rally, Government Ally Withdrawal

March 7 (Bloomberg) -- India's benchmark stock index fell the most in a week as an oil-price rally stoked inflation concerns and an ally of Prime Minister Manmohan Singh vowed to pull out of his ruling coalition.

State Bank of India, the nation's biggest, lost the most in more than a week. Oil gained a second day, rising above $105 a barrel in New York, as unrest in Libya renewed concern supply disruptions may spread. The Dravida Munnetra Kazhagam said March 5 it would end support for Singh's National Congress party-led government over a disagreement on seats to be contested in a regional election. Tata Motors Ltd., the biggest truckmaker and owner of Jaguar Land Rover, dropped 4.2 percent.

"The political uncertainty has added to the existing uncertainty of the markets," said Sadanand Shetty, a Mumbai- based fund manager at Taurus Asset Management Co., which manages about $665 million. Inflation, interest rates and oil price concerns are weighing on investors' sentiment, he said.

The Bombay Stock Exchange's Sensitive Index, or Sensex, lost 220.54, or 1.2 percent, to 18,265.91 at 2:42 p.m. in Mumbai, the most since Feb. 24. The S&P CNX Nifty Index on the National Stock Exchange retreated 1.9 percent to 5,435.75, while its April futures traded at 5,454.85. The BSE 200 Index slid 1.7 percent to 2,226.86.

Asia's Worst Performer

State Bank decreased 3.1 percent to 2,622.25 rupees, heading for its steepest fall since Feb. 24. Larsen & Toubro Ltd., the biggest engineering company, declined 3.3 percent to 1,558 rupees, while its April futures traded at 1,563.75 rupees.

The Sensex has lost 11 percent this year, the worst performer in Asia among benchmark indexes tracked by Bloomberg, as India's central bank raised interest rates to stem inflation worsened by a rally in the price of oil. Sensex companies trade at an average 17 times estimated profit, down from a high of about 21 times a year ago, data compiled by Bloomberg show.

Tata Motors slid 4.2 percent to 1,126.75 rupees, while its April futures traded at 1,111.2 rupees. Mahindra & Mahindra Ltd., the largest maker of sport-utility vehicles and tractors, declined 2.4 percent to 659.65 rupees. Maruti Suzuki India Ltd., the biggest carmaker, decreased 2.6 percent to 1,278 rupees, while April futures traded at 1,254.15 rupees.

Higher oil prices are a "serious issue," Finance Minister Pranab Mukherjee said March 3. India gets about three-quarters of its oil from abroad. Oil futures for April delivery climbed as much as 1.9 percent to $106.45 a barrel in New York after fighting between Libyan rebels and troops loyal to Muammar Qaddafi intensified. Futures rose 6.7 percent last week, the third straight advance.

Facing Elections

India's benchmark wholesale-price inflation rate averaged 9.4 percent in the nine months through December, the most in the past decade, the finance ministry said in a report on Feb. 25. The gauge rose 8.23 percent in January. The central bank has raised borrowing costs seven times in the past year to moderate price pressures in the world's second-most populous nation.

Singh is trying to contain the pace of price increases, which are eroding purchasing power, as his Congress party faces five state elections this year.

The Dravida Munnetra Kazhagam, among 10 parliamentary partners of Singh's coalition, said on March 5 it would end support for the federal government after the parties failed to agree on the number of seats each would contest in assembly elections in southern Tamil Nadu state, the DMK's base.

'Too Much Uncertainty'

The political dispute "affects stability," said A.S. Thiyaga Rajan, senior managing director at Singapore-based Aquarius Investment Advisors Pte., who oversees $350 million of assets in India. "There's too much uncertainty to enter the market now and there will be better opportunities in the future. The company is taking profit when there's opportunity to wait for better entry points."

Relations between the Congress and its southern ally have been strained since former telecommunications minister Andimuthu Raja, a member of the DMK, was arrested on Feb. 2 in a federal probe into the 2008 sale of mobile-phone licenses.

DB Realty Ltd., a developer, slid 3 percent to 114.2 rupees after saying Shahid Balwa resigned as managing director amid a probe that led to his arrest by the nation's federal investigators last month.

Balwa, also vice chairman of Etisalat DB Telecom Pvt., was arrested on Feb. 8 as the Central Bureau of Investigation extended its probe into the mobile-phone license sale. The agency has argued in court that Raja conspired to benefit companies including the then Swan Telecom Ltd., now known as Etisalat DB Telecom, and Unitech Ltd. by violating guidelines in the license sale.

Unitech, the second-biggest developer, dropped 3.8 percent to 35.1 rupees, extending this year's loss to 47 percent.

Overseas investors bought a net 2.81 billion rupees ($62.5 million) of Indian equities on March 3, reducing their outflow from equities this year to 87.2 billion rupees, according to data on the website of the Securities and Exchange Board of India.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net