Bloomberg/Mumbai

Indian stocks dropped, extending a three-week slide, after the rupee declined and as foreign funds capped the biggest sell-off in almost two years.

The S&P BSE Sensex retreated 1.2% to 18,540.89 in Mumbai, the lowest close since April 15. Volume on the gauge was 32% higher than the 30-day average. Larsen & Toubro, the nation’s largest engineering company, retreated to more than a two-month low. Cigarette maker ITC, which has the highest weighting on the Sensex, fell for the fifth day, the longest losing run in 13 months.

India’s rupee weakened 0.8%, extending a seven-week slide, after overseas investors pulled $4.6bn from Indian bonds and shares this month on the prospects of the US paring stimulus policies. Emerging-market stocks tumbled to a one-year low as Chinese equities entered a bear market after the central bank signalled it will maintain efforts to curb credit growth.

“Investors are turning totally risk-off amid the global selloff as nobody wants to catch a falling knife,” Jitendra Panda, head of broking at Capital First, said by phone from Mumbai. “China data is not supporting regional markets. More losses are expected.”

Larsen & Toubro decreased 2.7% to Rs1,354.60, the lowest level since April 10. ITC slid 2.5% to Rs314.40, a fifth day of loss, the longest losing run since May 8, 2012. Software exporter Infosys fell 1.6%, the lowest price since June 20. Oil & Natural Gas Corp tumbled 2.9% to Rs298.80. The four stocks have a combined 27% weighting in the Sensex.

The rupee weakened 0.7% to 59.6750 per dollar. It touched a record low of 59.98 on June 20. The currency declined 5.3% this month, Asia’s worst performance.

Foreigners pulled a net $358mn from Indian shares on June 20, the most since August 9, 2011. That extended withdrawals from stocks in June to $760mn, putting funds on course to end 12 months of net buying, data compiled by Bloomberg show. Overseas investors have invested a net $14.3bn in local shares this year, still a record for the period, the data show.

Prime Minister Manmohan Singh’s administration has changed policies since September to revive the economy that expanded a decade-low 5% in the year ended March 31. Those changes may slow as political parties prepare for elections due by May next year, according to brokerage Kotak Institutional Equities.

“We’re looking at few months of political uncertainty, may be a slowdown in reforms, which is not a case for lots of money coming to India,” Sanjeev Prasad, co-head and senior executive director at Kotak, said in an interview to Bloomberg TV India yesterday.

“The government has been trying to address the high fiscal and current-account deficits and a weak investment climate. It may not have the time to take the process to its logical end given that we have elections in a few months.”

The MSCI Emerging Markets Index fell 1.4% to 888.86 at 7:25 pm in Hong Kong, the lowest level since June 5, 2012. The CSI 300 Index, representing the 300 biggest companies in the Shanghai and Shenzhen stock exchange, slumped 6.3%, sliding 22% from this year’s closing high of 2,775.84 on February 6. More than $19bn was pulled from funds investing in developing-nation assets in the three weeks to June 12, the most since 2011, according to data from EPFR Global.

“If emerging markets are not the flavor then we will see less money coming, or may be money going out,” Kotak’s Prasad said. “Given the recovery in the US at some point in time the Fed will stop” the bond-buying program, he said.

The Sensex is valued at 12.7 times projected 12-month earnings, the cheapest since April, compared with the MSCI Emerging Markets Index’s 9.2 times. The CNX Nifty Index on the National Stock Exchange of India fell 1.4% to 5,590.25. Its June futures settled at 5,600. India VIX, which gauges the cost of protection against losses in the Nifty, surged 10% to a one-year high.

India funding strain grows as Fed outlook hurts rupee

India faces growing strain to fund the widest current-account deficit in major Asian nations after the rupee slid to an all-time low on concern the US will curb monetary stimulus as its economy improves.

The deficit narrowed to $21bn last quarter, from $32.6bn or a record 6.7% of gross domestic product in October to December, the median of 10 estimates shows in a Bloomberg News survey before data due June 28. The Reserve Bank of India estimates the sustainable level at 2.5% of GDP.

The rupee touched the weakest level versus the dollar on June 20 after Federal Reserve Chairman Ben S Bernanke said the US central bank will probably taper bond purchases this year if the American economy performs as it projects. The potential for reduced stimulus exposes emerging nations from India to Indonesia and Brazil to the risk of capital outflows.

“The prospect of the US unwinding stimulus means that funding the shortfall will get more challenging,” said Sonal Varma, an economist at Nomura Holdings in Mumbai. “Even if the deficit narrows, it will remain too high for comfort.”

The rupee’s 9% tumble this quarter is the worst in Asia, according to data compiled by Bloomberg. India is prepared to take action to reduce volatility as needed, Raghuram Rajan, the top adviser in the Finance Ministry, said June 20. The imbalance in the current account, the broadest gauge of trade, is the biggest risk to an economy that grew a decade-low 5% in the year ended March, according to the Reserve Bank.

Foreign-direct investment in India fell the most in more than a decade last fiscal year, increasing reliance on stock and bond inflows to fund the shortfall.

Imports of gold and crude oil, and subdued exports amid an uneven global recovery, have stoked India’s current-account gap.

The International Monetary Fund estimates the shortfall at 4.9% of GDP this year, compared with 3.3% in Indonesia and a surplus of 2.6% in China. India’s imbalance is the widest in Asian economies with GDP exceeding $100bn, the data shows.

“While the deficit is expected to narrow gradually this year, the combination of rising US yields and the potential rise of the dollar will mean that India will continue to face funding risks,” said Chetan Ahya, an economist at Morgan Stanley in Hong Kong.