Stocks retreat as BoJ holds fire, Brexit drives volatility

Indian stocks declined on Thursday, after the Bank of Japan (BoJ) refrained from adding to stimulus and as concern that the UK will leave the European Union (EU) continued to cast a pall over the global outlook.

The BSE Sensex tracked losses in Asia to fall 0.8 per cent to 26,525.5 at the close in Mumbai. The gauge rallied 1.3 per cent on Wednesday after dropping 2.3 per cent over the previous four days. The rupee weakened 0.2 per cent to 67.27 a dollar, according to prices from local banks. The currency has lost 1.7 per cent this year in Asia's worst performance.

The BoJ decision came after the Federal Reserve signaled a more gradual path to raising interest rates, citing uncertainty over the UK's June 23 referendum on whether to stay in the EU. Anxiety that Britain will vote to leave the EU has burdened financial markets on speculation it will weaken the global recovery. The India NSE Volatility Index, a measure of protection against stock-market swings, rose 3.8 per cent to its highest level since April 5.

"Brexit is right now on everybody's mind," Vikas Khemani, chief executive officer at Edelweiss Securities Ltd. in Mumbai, said in an interview to Bloomberg TV India. "If it were to happen it will create chaos in the short term."

Maruti Suzuki India Ltd., the country's largest carmaker, fell three per cent, the most since April 5, and ITC Ltd., India's biggest cigarette company, dropped 1.3 per cent. Infosys Ltd., the second-largest software services provider that gets about a quarter of its revenue from Europe, extended this month's loss to five per cent. Bharti Airtel Ltd. and NTPC Ltd. both slid 1.5 per cent.

"Banks and software stocks are hurt by the weak growth outlook from the Fed and BoJ," said Rikesh Parikh, vice-president at Motilal Oswal Securities Ltd. in Mumbai. "Traders are bracing up for more global turmoil as we near the Brexit vote."

Associate banks of State Bank of India (SBI) extended gains as the government approved a merger with their parent, amid a push to strengthen the nation's fragmented banking industry. State Bank of Bikaner & Jaipur surged 16 percent, while State Bank of Travancore jumped 15 per cent to its highest level since August 2014. State Bank of Mysore increased by the 20 percent daily limit, taking this month's advance to 48 per cent. State Bank of India was little changed.

The smaller banks "are rallying as investors are betting on good valuations and share-swap ratios while being merged with SBI," said Hatim Broachwala, an analyst at Nirmal Bang Institutional Equities. "SBI's profit growth and shareholder returns will see strong improvement" once the deals are completed, he said.

The Sensex has risen 1.6 per cent this year and trades at 16.3 times 12-month projected earnings versus 11.6 for the MSCI Emerging Markets Index.