Indian shares fall more than 2 pct after rate rise
Thursday, 26 June 2008

REUTERS, BANGALORE - Indian shares fell more than 2 percent on Wednesday to their lowest in more than a year, after the Reserve Bank of India (RBI) aggressively tightened monetary policy to rein in double-digit inflation.

No. 2 lender ICICI Bank led the losses, sliding 3.3 percent to 682 rupees as higher interest rates were expected to dampen demand for loans. Top lender State Bank of India fell nearly 2 percent to 1,180 rupees.

After the market closed on Tuesday, the RBI raised its key lending rate by 50 basis points to 8.5 percent with immediate effect, its highest since March 2002 and the second increase this month.

It also increased the proportion of deposits banks must keep with the central bank to 8.75 percent from 8.25 percent in two stages of 25 basis points each on July 5 and July 19.

An increase in interest rates was expected after the annual inflation rate surged to a 13-year high in early June above 11 percent.

"The market was expecting some tough action from the central bank after the sharp rise in the inflation rate, so the move has not come as a complete surprise," said Neeraj Dewan, a director at Quantum Securities in New Delhi.

"In a way, the market will be relieved that the rate hike is finally out of the way. In the short term, there is still some pain left in the market, but the medium to long-term prospects are still positive."

At 10:31 a.m, the main 30-share BSE index was down 1.13 percent, or 159.32 points, at 13,947.26, after having opened down 2.3 percent and falling as much as 2.6 percent to 13,736.01 -- its lowest level since May 11, 2007.

Twenty-three of the index's components fell. At Wednesday's low, the benchmark had shed 12.5 percent over six days.

In the broader market, 1,445 losers were ahead of 516 gainers on volume of 53 million shares.

Dipak Acharya, fund manager at BoB Asset Management Company, said the market pared some of its early losses on short covering ahead of the monthly expiry of derivatives contracts on Thursday.

Still, investors were edgy ahead of a meeting between India's coalition government and its communist allies expected at 4 p.m. to thrash out a compromise over a controversial nuclear deal with the United States.

The left parties have said they would withdraw crucial parliamentary support to the minority ruling coalition if the government went ahead with the energy pact.

"Traders are advised not to get sucked into a pullback, if any. Recent recoveries have been on low volumes and poor breadth with no major fresh buying," Mumbai brokerage India Infoline wrote in a research note.

Shares in auto makers such as Maruti Suzuki dropped 1.3 percent to 670.05 rupees and Tata Motors fell 1.4 percent to 475 rupees on expectation high interest rates would hit demand.

The 50-share NSE index or Nifty fell 0.69 percent to 4,162.20 points.

Elsewhere in the region, the Karachi's 100-share index rose 1.12 percent to 12,257.98, while Colombo's All share index was down 0.21 percent at 2,476.23.

STOCKS ON THE MOVE

* Spice Communications Ltd soared 25 percent to 68 rupees after Idea Cellular said it would buy stake in Spice at 77.30 rupees a share.

* Jet Airways lost 5.2 percent to 494 rupees after India's top private airline posted a fourth quarter loss versus a profit a year ago on soaring jet fuel prices and said it expected the next few quarters to be very challenging.


MAIN TOP 3 BY VOLUME

* Spice Communications Ltd on 8 million shares

* Reliance Petroleum Ltd on 3.3 million shares

• Reliance Natural Resources Ltd on 3.2 million shares

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