Bloomberg/Mumbai

Indian banking stocks climbed after last week’s plunge drove valuations to their cheapest level in three years versus the benchmark gauge. Larsen & Toubro and Reliance Industries dropped after reporting earnings.

The S&P BSE Bankex index of 13 lenders added 1% after tumbling 6.2% last week. ICICI Bank, India’s biggest private lender by assets, rebounded 1.6% from a 10-month low. Larsen, India’s biggest builder of power networks and airports, slumped the most in four years. Reliance slid 1.6%, ending a seven-day rally.

The S&P BSE Sensex rose 0.1% to 20,159.12 at the close. Volume was 12% below the 30-day average. Banks slumped last week after the central bank raised two interest rates to steady the rupee. Larsen’s profit dropped 13% to Rs7.56bn ($127mn) in the June quarter. That trailed the Rs9.06bn-median of 38 analysts’ estimates in a Bloomberg survey.

“Banks are rebounding from an oversold zone,” Sandeep Gupta, head of equity advisory with Motilal Oswal Securities, said by phone from Mumbai yesterday. Lenders’ shares “had reacted quite a bit to the RBI’s measures.”

Reserve Bank of India Governor Duvvuri Subbarao increased the bank rate and the marginal standing facility rate on July 15 and capped daily fund injections via repo contracts, after the rupee sank to a record-low against the dollar.

ICICI Bank advanced 1.6% to Rs974.45 in its steepest gain since July 11. Bank of Baroda rose 3% to Rs589.2. Mortgage lender Housing Development Finance Corp climbed 3.4% to Rs830.3.

The Bankex index trades at 11.5 times reported earnings, compared with the Sensex’s 17.5 multiple. That’s the widest discount since March 2010, data compiled by Bloomberg show.

Larsen slumped 7.4% to Rs901.5, the steepest decline since July 2009. Reliance dropped 1.6% to Rs909.05 after its sales fell 4.6% in the June quarter.

Only two out of the seven Sensex members that have posted earnings so far have missed analysts’ estimates for the three months ended June. That compares with 27% companies that missed forecasts for the March quarter and 43% in the three months through December, data compiled by Bloomberg show.

The RBI’s move to raise two of its interest rates while keeping the main repurchase rate unchanged doesn’t signal a shift toward a tightening bias, Finance Minister Palaniappan Chidambaram said.

“What I think the central bank did a few days ago is not to be understood as affecting the policy rate one way or another,” Chidambaram said in an interview July 20 in Moscow, where he’s attending a meeting of Group of 20 finance ministers and central bankers. “That decision will be taken separately.”

Global investors bought $67mn of local shares on July 19, taking this year’s inflows to $12.4bn, data compiled by Bloomberg show. Overseas funds have sold a net $934mn of Indian stocks this month, the highest among 10 Asian markets tracked by Bloomberg, extending June’s $1.8bn sell-off, the data show.

The Sensex has gained 3.8% this year and trades at 14 times projected 12-month earnings, compared with the MSCI Emerging Markets Index’s 9.9 times.

The CNX Nifty Index on the National Stock Exchange of India gained less than 0.1% to 6,031.80. India VIX, which gauges the cost of protection against losses in the Nifty, fell 2.8%.

Meanwhile, volatility in India’s rupee fell to a one-month low on speculation steps by the central bank to boost returns on local-currency assets will be offset by the country’s slowing growth and record current-account deficit.

The shortfall in the broadest measure of trade widened to 4.8% of gross domestic product in the year to March 31, as the economy grew at 5%, the slowest pace in a decade.

“Despite the RBI’s measures, headroom for rupee appreciation is not significant given India’s current-account deficit and weaker growth,” said Radhika Rao, an economist at DBS Bank in Singapore.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 39 basis points, or 0.39 percentage point, to 11.41%, according to data compiled by Bloomberg. It touched 11.21% earlier yesterday, the lowest level since June 19, after reaching 13.64% on July 9, the highest since May 2012.

The rupee declined 0.6% to 59.7225 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg.

Three-month onshore rupee forwards strengthened 0.2% to 60.77 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts fell 0.1% to 60.72.