India's stock markets fall nearly 2 percent to lowest in a year

By Karen Rebelo

MUMBAI (Reuters) - India's stock markets fell nearly 2 percent on Tuesday to their lowest in around a year on concerns that foreign investors would pare some of their holdings as China's equity markets continued to tumble.

India's volatility index, often called a fear gauge, was up 13 percent after earlier hitting its highest level since May 2014 and traders expect additional gains ahead of the expiry of monthly derivatives contracts on Thursday. The gauge surged 64.4 percent on Monday.

Despite fears foreign institutional investors (FIIs) would book some profits after a two-year rally in Indian shares, analysts say India could fare better than other emerging markets given optimism about the domestic economy and subdued inflation.

"We are not isolated from the global turmoil but the internal factors are not very bad for India and FIIs are selling because of global play," Alex Mathews head of research at Geojit BNP Paribas said.

The benchmark BSE Sensex was down 1.45 percent at midday India time (0630 GMT) after earlier falling as much as 1.7 percent to its lowest since Aug. 8, 2014. The index had started the session with gains of as much as 1.5 percent.

The broader Nifty was down 1.52 percent after earlier hitting its lowest since Aug. 12, 2014.

FIIs held about 25 percent of India's stock market capitalisation as of March, according to a report by investment bank Kotak.

All sectors were trading in the red with the exception of resources stocks. Pharma and IT stocks were the biggest drags on the index with Sun Pharma down 3 percent, Lupin down 3.9 percent, Infosys down 3.5 percent and HCL Tech down 2.3 percent.

Meanwhile, Coal India was up 2.7 percent; BPCL and Cairn India gained 1.2 percent each receiving a boost from the fall in crude oil prices.

(Reporting by Karen Rebelo; Editing by Rafael Nam & Shri Navaratnam)