Indian shares dropped 1.5 percent on Tuesday to their lowest close in seven months, as rising borrowing costs and high inflation drove investors to cut their exposure and move elsewhere. Financials led the fall on worries higher interest rates would dampen demand for loans and hit their margins.
Engineering and construction firm Punj Lloyd tumbled 10.8 percent after it posted a net loss for the December quarter. Around 4.3 million shares changed hands on the BSE, nearly six times its 30-day average volume.
The 30-share BSE index fell 1.45 percent or 261.49 points to 17,775.70, its lowest close since July 8. Twenty-five of its components lost ground. The 50-share NSE index shed 1.6 percent to 5,312.55.
The banking sector index shed 2.3 percent. Subir Gokarn, a deputy governor at the Reserve Bank of India, said on Monday that the monetary policy stance remained anti-inflationary, as headline inflation at 8.43 percent continues to be high.
So far this year, the BSE index has lost 13.3 percent, making it the worst performer amongst its peers in Brazil, Russia and China, on foreign fund outflows of $1.3 billion.
In comparison, Brazi's Bovespa and China's Shanghai Composite Index have dropped 5.7 percent and 0.3 percent respectively. Russia's RTS index has registered an 8.7 percent gain in year-to-date.
Investors spurned emerging market equities, moving more cash into developed market stocks on a brightening economic environment, fund-tracker EPFR Global said on Friday.
For the week to February 2, BRIC equity funds had net outflows of $316 million, a 10th consecutive week of redemptions. Top lender State Bank of India fell 0.9 percent, while rivals ICICI Bank and HDFC Bank dropped nearly 3 percent and 1.7 percent respectively.
Metal makers fell as London copper declined ahead of the return of China from a week-long holiday, and the rally of the past two weeks that reached a record high may have peaked for a while as technical indicators turn bearish.
Tata Steel, the world's seventh-largest steel maker, fell 3.2 percent and non-ferrous metals producer Sterlite Industries lost 2.5 percent. Market breadth was weak with more than four shares declining for every share that advanced on low volume of 238 million shares.