Sensex falls over 500 points, marks biggest single-day fall since Sept

MUMBAI (Reuters) - The BSE Sensex and Nifty slumped more than 2 percent on Tuesday, marking their biggest single-day fall in over 10 months and retreating from record highs hit earlier in the session, after the railway budget raised worries the government would slash spending.

The railways budget has revised up the plan outlay to 654.45 billion rupees for 2014/15, up 1.8 percent compared with the interim budget's estimate of 643.05 billion rupees, but lower than market's expectations, traders said.

Analysts also said the plan in the railway budget to seek private funding for new projects did not provide enough details on how it would attract investors.

The railway plans set up expectations the government would slash spending when it unveils its federal budget on Thursday. Although equity investors are keen to see fiscal discipline, analysts also warn that big cuts in spending could hurt earnings in sectors such as railways that depend on state investments.

Finance Minister Arun Jaitley reiterated his message of fiscal discipline on Tuesday by separately saying a "judicious balance" should be struck between expenditure and tax collections.

Profit-taking after a string of record highs in previous sessions coupled with overseas institutional investors' sales of 14.87 billion rupees ($248.45 million) in equity derivatives on Monday, also aided risk aversion.

"The budgeted outlay in railway is just in line with the inflation rate. One should expect the federal budget to be even tighter on spending as situation for broader economy is much worse than for railways," said G. Chokkalingam, founder of Equinomics, a research and fund advisory firm.

The broader Nifty slumped 2.11 percent, or 163.95 points, to end at 7,623.20, after earlier marking its fourth straight record high at 7.808.85.

The Sensex fell 2 percent, or 517.97 points, to end at 25,582.11, after earlier hitting its second consecutive life high at 26,190.44.

Both indexes marked their biggest single-day fall since Sept. 3, 2013.

Larsen & Toubro fell 4.4 percent while Reliance Industries lost 3.1 percent.

In other blue-chips, Tata Consultancy Services fell 1.6 percent and Oil and Natural Gas Corporation lost 4.5 percent.

Among lenders, ICICI Bank lost 2.8 percent while State Bank of India ended down 4.1 percent.

IndusInd Bank lost 0.9 percent, a day ahead of reporting its April-June earnings.

Railway-related stocks slumped on disappointment pertaining to the budgeted outlay for 2014/15.

Texmaco Rail & Engineering Ltd slumped 19.9 percent, while Kalindee Rail Nirman Engineers, Titagarh Wagons Ltd and BEML Ltd fell 5 percent each.

However, among gainers, Aban Offshore surged as much as 9.8 percent to 940 rupees, its highest since May 14, 2010, on hopes it may enjoy higher rig rates in the coming quarters, dealers said.

Aban shares ended up 3.1 percent.

(Reporting by Abhishek Vishnoi; Editing by Sunil Nair)