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The BSE benchmark Sensex fell 2.3 per cent on Tuesday after an early rally gave way to deeper concerns about sluggish consumer spending that has forced companies such as steel and truck makers to cut output.
The slide gathered momentum after European shares dropped, putting the focus on the global economic gloom and rising withdrawals by foreign funds from emerging markets like India.
Financials, which had initially led the main index up more than 3 per cent, swung the other way and ended lower on worries about possible defaults in a slowing economy.
“Sentiment remains weak because economic fundamentals are not stable,” said Nilesh Doshi, head of research at Techno Shares & Stocks. “The (early) spike was only because of correlation to global markets.”
Asian bourses had climbed after the US government’s rescue plan for Citigroup relieved wary investors.
The 30-share BSE index shed 2.33 per cent, or 207.59 points, to 8,695.53. It had initially risen as high as 9,182.80 points, but is down 57.1 per cent so far this year.
The Organisation for Economic Cooperation and Development (OECD) said on Tuesday India’s economy was expected to expand about 7 per cent in 2008 and 2009 before recovering to above 8 per cent in 2010 as world growth picks up.
India’s economy, Asia’s third largest, has grown at 9 per cent or more in the past three fiscal years.
“The economy is projected to slow further over the next year and to recover in tandem with the world economy in 2010,” the OECD said in a report.
Twenty-three of the BSE index’s components fell, while in the broader market losers led gainers 1.5:1 on moderate volume of 225 million shares.
“Markets will remain volatile till they discount future economic concerns and a bottoming out is likely only next quarter,” Doshi said.
Foreign funds have pulled out a net $13.6 billion from Indian shares this year, contributing to the slide.
Reliance Industries, India’s biggest private sector company, led the losses shedding 6.4 per cent to 1,071.70 rupees. State Bank of India, the country’s largest lender, and mortgage lender Housing Development Finance Corp fell 6.6 per cent and 1.7 per cent respectively to 1,072.15 rupees and 1,350.20 rupees.
Finance Minister Palaniappan Chidambaram had raised expectations for easier monetary policy when he said late on Monday the focus was now towards stimulating growth and the central bank was likely to lower rates as inflation cooled.
ICICI Bank, the second-largest lender, also eased 0.8 per cent to 319.95 rupees, but rival HDFC Bank closed up 0.4 per cent at 835.10 rupees. The bank index was down 2 per cent.
“Temporarily, expectation has been built in of a rate cut when inflation comes down. But overall the sector still has a downward bias,” Doshi said.
Utility vehicle and tractor producer Mahindra & Mahindra lost more than 7.6 per cent to 276.65 rupees.
“The auto sector is under pressure. We have seen Ashok Leyland and Tata Motors cutting production at their plants. The consumer spending for autos has also come off,” Amitabh Chakraborty, president-equities at Religare Securities said.
The 50-share NSE index fell 2 per cent to 2,654 points.
