Indian stocks dropped more than 2 percent in their biggest daily fall since late February, while the rupee also slipped, after a spike in global risk aversion triggered fears of foreign selling at a time of waning confidence in a struggling government. Selling accelerated in the afternoon after unexpectedly sharp falls in manufacturing activity at Germany and France, added to data earlier that also showed a drop in the HSBC flash manufacturing index for China.
That was then followed by the government's reversal in a recently announced hike in rail fares. The news combined to spark fears that foreign investors would head for the exits, especially after the government's larger-than-expected borrowing plan in its 2012/13 budget last week raised doubts about its fiscal stance.
"The draft CAG report and fare rollback is damaging the Indian government's credibility further, which is spooking FII investors," said Nirmal Jain, chairman and managing director at brokerage India Infoline. Foreign investors are vital to Indian stock markets, and their strong net purchases of about $9 billion in the year to date had propelled gains of 14 percent in the Sensex as of Wednesday, gains which some fear could now be reversed.
The main 30-share BSE index fell 2.3 percent, or 405.24 points, to close at 17,196.47, its biggest one-day fall since February 27. The 50-share Nifty index lost 2.5 percent, or 136.50 points, to end at 5,228.45. Liquid blue chip stocks were among the hardest hit, with Reliance Industries ending down 4.1 percent amid additional fears about slower earnings in the fourth quarter on the back of lower petrochemical margins among other factors.
Banks were also among the leading decliners, with State Bank of India dropping 3.2 percent. Among other decliners, shares of gold financing non-bank finance companies - Muthoot Finance lost 9.5 percent, while Manappuram Finance dropped 18.4 percent after the Reserve Bank of India imposed a lower loan-to-value requirement that was seen hitting margins in the sector.