The Indian stock markets plunged to five-month lows on Wednesday as algorithmic trading platforms triggered heavy sell-off besides continued offloading of shares held by overseas investors amid uncertainty over retrospective tax.
The S&P BSE Sensex fell 722.77 points or 2.63% to close at 26,717.37, its lowest level so far this year. The CNX Nifty index ended at 8,097, down 227.80 points or 2.74 percent.
"In today's case, a breach of the 200-day average (considered a strong support for Nifty) triggered strong selling on algo platforms," Nilesh Dedhia, founder of NTD Trading, which specialises in providing algo-based trading platforms, to NDTV Profit.
The sell-off was also fuelled by the continued uncertainty over Minimum Alternate Tax (MAT) on foreign investors. The government has asked them to pay MAT on long-term capital gains from equities earned previously.
Finance Minister Arun Jaitley has said that the MAT is not applicable on capital gains made by foreign investors as of April 2015, without giving any clarification on tax over previous gains.
Foreign investors sold shares worth more than $1.7 billion in the past 13 sessions.
Analysts say that other factors such as weak corporate earnings and slow pace of reforms are also driving the markets lower.
"Corporate earnings and economic growth remain weak. I don't see them recovering anytime soon," Shankar Sharma of First Global, told The Economic Times.
Markets are also rattled by growing pessimism among foreign investors over the slow pace of reforms by the Modi government.
"I think there was a lot of hope with the election of Narendra Modi that we would essentially have wide ranging reforms. So the stock market rallied very strongly. Now, we have a kind of an awakening that reforms will take a lot of time and many will not be implemented. Some reforms will be accompanied by new regulations. So I think that investors are sobering up a little bit," Marc Faber, a renowned global investor, told Business Standard.
Marc Faber says Sensex could easily drop to 24,000 - 25,000 levels.
Markets are expected to remain under pressure in the short-term as concerns grow over below-normal monsoon, rising global crude oil prices and impending US interest rate hike.
"The market may see a further downside and a double-digit correction from the current levels won't be surprising," Pramod Gubbi, Director-Institutional Sales at Ambit Capital, told CNBC-TV18.
