India's key share index wiped out the previous day's gains on Tuesday, ending at a three-week low on concerns that foreign portfolio investors may wait on the sidelines until after the upcoming national elections.
The rupee made some more gains against the dollar, helped by trade and foreign capital inflows into the expanding economy.
The 30-issue Mumbai share index slid 2.34 percent to 5,922.11 points, surrendering Monday's two percent gain.
The index, which hit a lifetime closing high last Wednesday, has now fallen in three of the four sessions since then, signalling a possible consolidation.
"The main worry is that the flows are likely to dry up as we head for elections," said Navin Roy, an equity dealer with TAIB Securities. The Bharatiya Janata Party-led ruling coalition is expected to call for national elections in the next three months.
"We had a strong rally on the back of massive fund flows and the market never got an opportunity to consolidate. The election uncertainty will give investors an opportunity to book profits."
Investors' concerns stem from the fact that foreign funds - whose record purchases of $6.7 billion in 2003 helped power the Bombay share index 73 percent higher last year - have been selling more in the past week than any time this month.
Off-shore funds sold local shares worth $31.7 million on Thursday and Friday, and though official data showed they bought a net $6.0 million on Monday, traders are uncertain of the trend.
Shares in state-run banks fell sharply on Tuesday on worries about quarterly earnings falling short of market expectations.
Syndicate Bank lost 7.6 percent to 39 rupees after its past quarter earnings fell 11.4 percent on-year.
State Bank of India, India's largest commercial bank, fell in sympathy, shedding 5.6 percent to 622.60 rupees. State-run Canara Bank slid 6.7 percent to 148.85 rupees.
But India's second-largest mobile phone firm, Bharti Tele-ventures, rose 5.5 percent to 118.40 rupees after reporting a consolidated net profit of 1.61 billion rupees in the past quarter, compared to a year ago loss of 70.7 million rupees.
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