Indian stocks tumbled the most in three weeks as concerns that the Federal Reserve will increase borrowing costs as early as next month outweighed election results that showed Prime Minister Narendra Modi’s main national opponents lost control of two states.
Adani Ports & Special Economic Zone was the worst performer on the S&P BSE Sensex. State Bank of India tumbled to a two-month low. Sun TV Network plunged the most in 11 months after the Dravida Munnetra Kazhagam party lost the Tamil Nadu state election. Sun TV is owned by Kalanithi Maran, grandnephew of DMK president. Larsen & Toubro, an engineering company, had the steepest loss in three months.
The S&P BSE Sensex tumbled 1.2% at the close, its biggest loss since April 28. The rupee weakened for a sixth day, the longest losing stretch since August, as Asian stocks and currencies fell after the Fed record showed most of its rate- setting officials were in favour of boosting borrowing costs next month. Higher interest rates would temper inflows to emerging markets, including India.
Chances of the “Fed raising rates next month is a bigger concern for the market,” RK Gupta, managing director of Taurus Asset Management Co, which has $586mn, said from New Delhi. “Election results were more or less as per the exit polls, and hence factored in the price. The market will react more to global factors until clarity emerges on the US rates.”
The Fed minutes provided a jolt to global markets that had until Monday all but ruled out the prospect of US interest rates being raised in June. Fed Funds futures show the odds of such a move surged to 32% on Wednesday, after tripling to 12% in the prior session.
The Congress party lost to the ruling Bharatiya Janata Party in Assam, ending its 15-year rule in the northeastern state. Two regional power brokers – Mamata Banerjee in West Bengal and Jayaram Jayalalithaa in Tamil Nadu – were both set to hold onto power.
The Congress party’s losses dilute its ability to thwart policies crucial to Modi’s economic reform agenda. While Modi was voted into office in 2014 with the biggest majority in three decades, he lacks an upper house majority and needs opposition support to enact policies such as the general goods and services tax.
After yesterday’s results, Congress will control outright just six of India’s 29 states, down from 15 in 2013. Modi’s party would hold power in 10 states, with regional parties and unwieldy coalitions leading the rest.