Emerging-Market Stocks Decline on India’s Rate Increase

Emerging-market stocks retreated from a four-month high, trimming their weekly advance, as India's banks drove a slump in financial shares after the nation's central bank unexpectedly lifted interest rates.

The MSCI Emerging Markets Index fell 0.6 percent to 1,016.23 at 11:20 a.m. in New York, paring its weekly rally to 3 percent. The S&P BSE Bankex sank 4.2 percent, sending India's benchmark equity index down from a three-year high. The Borsa Istanbul National 100 Index tumbled after entering a bull market yesterday, while Brazil's Ibovespa fell as Vale SA paced declines in exporters. Indonesia's rupiah led losses in 18 of 24 developing-nation currencies tracked by Bloomberg.

Financial stocks led losses in the measure for developing nations after India's central bank Governor Raghuram Rajan surprised analysts by raising the benchmark interest rate in his first policy review, seeking to rein in inflation. Investors also watched speeches from Federal Reserve policy makers for clues on when the central bank may scale back stimulus.

"It's a knee-jerk reaction by the market to say 'oh they are rising interest rates, it is bad for banks,'" Christian Keller, the head of emerging-market research at Barclays Plc in London, said by phone. "A lot of people were rather betting on easing of monetary policies in India."

The measure for developing markets extended this year's decline to 3.7 percent, trading at 10.7 times projected earnings, according to data compiled by Bloomberg. That trails the 14 valuation of the MSCI World Index.

Emerging ETF

The iShares MSCI Emerging Markets Index exchange-traded fund, the developing-nation ETF, fell 1.4 percent to $42.46. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, rose 2.7 percent to 22.39.

Stocks in developing nations were set for a third weekly gain as the Fed unexpectedly refrained from reducing its $85 billion in monthly asset purchases, saying it needs to see more signs of sustained labor market gains.

"The emerging markets overall seemed to rally on the idea that there wasn't going to be a giant sucking sound of liquidity as a result of the Fed cutting back on its stimulus," Brian Jacobsen, who helps oversee $221.2 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said by phone.

Brazil's Ibovespa fell for a second day as exporters including iron-ore producer Vale tumbled with commodity prices. Banco Bradesco SA led declines among banks. The real surged 3.8 percent this week, the most since January 2012, driving down the price of imports.

Russia, Turkey

Russia's Micex Index declined, trimming its weekly gain to 2.5 percent. OAO Mechel, the nation's biggest producer of coal for steelmakers, slumped 1.7 percent. The Borsa Istanbul National 100 Index sank 2 percent as Turkiye Garanti Bankasi AS (GARAN) led losses in lenders. Benchmark gauges in the Czech Republic and Hungary declined at least 1.2 percent.

India's S&P BSE Sensex slid 1.9 percent, paring the week's gain to 2.7 percent as ICICI Bank Ltd. (ICICIBC), the second-biggest lender, tumbled. The rupee fell, paring the week's advance to 2 percent, prices from local banks compiled by Bloomberg show.

Asian currencies rallied this week by the most in a year as Malaysia's ringgit strengthened 4 percent, the Thai baht appreciated 2.9 percent and the Indonesian rupiah gained 0.5 percent. Global funds bought $494 million more stocks than they sold in the first four days of the week in Indonesia, the Philippines and Thailand.

The premium investors demand to own emerging-market debt over U.S. Treasuries was unchanged at 313 basis points, according to JPMorgan Chase & Co.