News: Indian shares drop 6 pct, rupee hits 3-yr low

(RTR 31/05/2006) Mumbai - Indian shares fell as much as 6.25 percent on Wednesday joining a drop across world markets, with a pullout by foreign investors pushing the rupee to a three-year low.

A stronger-than-expected 9.3 percent economic expansion in the January-March quarter from a year earlier, along with central bank intervention, helped pull back the rupee slightly.

But expectations the robust growth would push up interest rates weighed on stocks and bonds.

Dealers said investors were nervous after an emerging markets sell-off this month caused by concerns about high valuations, rising interest rates in Japan and the United States and volatile commodity prices.

"The fall in Indian market is related to global liquidity movement," Swati Kulkarni, a fund manager with UTI Mutual Fund, which controls assets worth $6.8 billion. "Other variables like the strength of the economy and structural advantages remain intact."

The 30-share BSE index was down 5.72 percent at 10,176.41 points by 0805 GMT, after falling as much as 6.25 percent. The benchmark has lost more than 20 percent from its all-time high of 12,671.11 points on May 11.

Shares in Japan and Singapore were down 2.5 percent after Wall Street fell 1.6 percent on Tuesday on concerns of a slowdown in U.S. consumption.

India has borne the brunt of a foreign sell-off, with outflows of $2.47 billion in 13 sessions to Monday. This has sliced net foreign fund investments to $2.38 billion since the start of January.

"The market will continue to be volatile. The recent fall has brought the valuations down to around 16 times forward earnings and we expect it to remain in a band of 16-19 times in the short-term," Kulkarni said.

Bellwether Infosys Technologies Ltd., India's No. 2 software exporter, lost 5.5 percent to 2,860 rupees on concerns about U.S. consumer spending that faces a potential slowdown due to high oil prices.

Top bike maker Hero Honda Motors Ltd. fell more than 7 percent and number two Bajaj Auto Ltd. lost 5 percent on concerns higher fuel prices would hit demand. India is expected to review domestic retail fuel prices by Friday.

The economic expansion in the fiscal fourth-quarter was higher than the revised October-December rate of 7.5 percent and above analysts' forecast for 7.8 percent annual growth. Analysts said this would boost prospects for an interest rate increase.

"The central bank may raise interest rates by 25 basis points in its next review," said Abheek Barua, chief India economist at ABN AMRO Bank. "We expect a GDP growth of 7.5 percent for the current fiscal year that began April 1."

RUPEE SLIDES, BONDS YIELDS RISE

The rupee dropped 0.6 percent on the day to 46.57 per dollar, its lowest since June 2003, according to Reuters data, before central bank intervention pulled it back slightly. At its lowest, it was down more than 3.0 percent this year.

Traders said the equity outflows made the rupee vulnerable to a widening trade deficit caused by high oil prices and rising imports to feed a robust economy.

"Recent trade data suggest further trend deterioration in India's external balance. Moreover, renewed oil price gains may exacerbate this," Standard Chartered Bank said in a report.

"In the immediate term, this may mean that the rupee may continue to underperform."

Oil is India's biggest import and analysts expect the rising oil bill to widen the trade gap to $59.1 billion in the year to March 2007 from $55 billion a year earlier. The trade deficit was at $4.21 billion in April, higher than $2.90 billion in March.

Federal bonds yields climbed to four-year highs on worries the central bank may raise short-term interest rates to defend the rupee and as investors braced for a fresh bond auction of $2.2 billion.