Sensex down on fears of economic slowdown

Mumbai: Indian shares fell 3.89 per cent on Tuesday to their lowest close in more than a week on concerns an unexpectedly aggressive policy tightening by the central bank to quash double-digit inflation would also slow economic growth.

The losses were led by banking stocks on worries higher rates would hurt loan growth, raise defaults and eat into margins. Leading private sector bank ICICI Bank fell 8.5 per cent to Rs607.40, its lowest close since July 17.

"The hikes were above consensus. We expect lending and deposit rates to rise further and growth to slow significantly. This will affect banks' net interest margins, loan growth and credit losses," said Macquarie Securities analyst Seshadri Sen.

Top lender State bank of India dropped 6.8 per cent to Rs1,321 and the sector index slid 8.3 per cent.

The Reserve Bank of India raised its key lending rate for the third time in two months, increasing the repo rate by a half a percentage point to a seven-year high of 9 per cent, and also raised the cash reserve ratio by 25 basis points.

An increase in the repo rate was expected but the size of it and the higher reserve requirements for banks caught the market off guard, and bank, auto, capital goods and realty stocks fell on concerns that consumption and growth would weaken.

The 30-share main BSE index dropped 557.57 points to 13,791.54, its lowest since July 18, with all but four components falling. It fell as much as 4.3 per cent during the day.

"We think that much higher interest rates will slow investment demand and growth, with the impact felt particularly in fiscal year 2009/10," Goldman Sachs economist Tushar Poddar said in a research note.

Reliance Industries, India's most valuable company, dropped 4.3 per cent to Rs2,085.20.

Top engineering and construction firm Larsen & Toubro fell 6.5 per cent to Rs2,546.10 and largest listed real estate firm DLF dropped 5.5 per cent to Rs471.90.

Top technology stocks, which earn most of their revenue from exports, bucked the trend and posted some late gains as the rupee weakened against the dollar.

IT bellwether Infosys Technologies inched up 0.1 per cent to Rs1,539.90 and top outsourcer Tata Consultancy Services gained up 0.3 per cent to Rs808.25.

In the broader market, 1,669 losers led 964 gainers on volume of 310 million shares.

Currency: Rupee weakens

The Indian rupee weakened yesterday after the central bank said it had stopped providing foreign exchange to oil companies in return for their oil bonds, a move likely to spur dollar demand in the currency market.

The partially convertible rupee ended at 42.64/65 per dollar, off an intraday high of 42.5150, and 0.2 per cent weaker than 42.55/56 at Monday's close.

"The rupee weakened after the central bank chief's announcement [on] special market operations with oil companies as it would create more demand for dollars and depreciate the rupee gradually," said L. Subramanian, chief dealer with ICICI Bank.

"The next technical resistance is seen at 42.92," he added.

India's central bank raised its benchmark rate by 50 basis points on Tuesday to its highest in seven years and hiked the cash reserve ratio, delivering a bigger-than-expected tightening to quell double-digit inflation.