REFILE-Indian stocks drop as banks hit, while earnings disappoint

(Refiles to remove extraneous matter at the bottom)

* BSE index falls 1.2 pct to lowest close since June 6

* Slew of earnings disappointment also weigh

* Oil stocks extend rout; diesel price hike seen delayed

By Manoj Dharra

MUMBAI, July 26 (Reuters) - Indian shares dropped to their
lowest close since early June despite broad gains in Asian
shares as lenders were hit by expectations the central bank will
keep interest rates on hold next week, while earnings
disappointment dented ITC and BHEL.

The Reserve Bank of India is expected to hold the repo rate
steady at its review on Tuesday, a Reuters poll showed, keeping
pressure on the government to reduce the fiscal deficit and take
steps to remove bottlenecks that are driving up food prices.

However, investors fear the government will hold off on
widely anticipated fuel subsidy and retail reforms because of
renewed opposition from party and coalition allies, which
extended recent falls in state-run oil stocks on Thursday.
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Market sentiment was also hit after provisional data showed
foreign investors sold a net 3.72 billion rupees ($66.23
million) o f shares on Wednesday, marking a second day of net
sales after strong buying earlier this month.

"RBI would maintain status quo on rates, but market would
only be a tad disappointed because it's well understood that
action is expected and should come from New Delhi," said Phani
Sekhar, fund manager of portfolio management services at Angel
Broking.

The 30-share BSE index fell 1.22 percent to
16,639.82 points, marking its lowest close since June 6.

The 50-share NSE index fell 1.3 percent to 5,043.00
points.

The losses came despite gains in Asian shares, with the MSCI
Asia-Pacific ex-Japan index rising 0.6 percent.

The expiry of derivatives at the end of the session kept
trading volatile, especially towards the end of the session.

Banks led decliners, with brokers citing heavily selling
from foreign investors. Of 20 economists polled by Reuters, 19
expect the RBI to keep the repo rate on hold.

Analysts also don't expect the central bank to deliver a cut
in the cash reserve ratio, or the amount of funds that lenders
must keep with the RBI, which would have had a more direct
benefit to the sector.

Private lender HDFC Bank fell 1.6 percent, while
State Bank of India fell 2.5 percent.

Worries about when the government would raise diesel prices
continued to route oil stocks. Oil and Natural Gas Corporation
fall 2.6 percent, while Hindustan Petroleum Corp
lost 2.8 percent, extending falls to a second day.

A slew of earnings disappointment also hit shares.

ITC shares lost 2.1 percent after India's largest cigarette
maker lagged market forecasts despite a 20 percent jump in
April-June profits, due to slower-than-expected growth in
cigarette volumes.

JSW Steel, India's No. 3 steelmaker, fell 3.9
percent after quarterly profit was half of what analysts had
expected due to a foreign exchange loss and higher raw material
costs.

Bharat Heavy Electricals Ltd shares fell 2 percent
despite posting a higher than estimate net profit because of
concerns over slowing order flows.

A slew of mid cap stocks slumped by double digits on
widespread speculation some investors were liquidating their
positions because of margin call pressures.

Tulip Telecom fell 26 percent, while Radico
Khaitan, Pipapav Shipyard, Parsvnath
Developers and Everonn Education fell
between 11-20 percent each.

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FACTORS TO WATCH
* Euro vulnerable as poor PMI data darkens outlook
* Oil above $103 after China data; Europe weighs
* Weak German factory data sends shares, euro lower
* Foreign institutional investor flows
* For closing rates of Indian ADRs

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(manoj.dharra@thomsonreuters.com)