Sensex heads towards lowest close in eight months; MSCI index review key

MUMBAI (Reuters) - The BSE Sensex fell on Tuesday, heading towards its lowest close in nearly eight months on worries China's potential inclusion in the MSCI Emerging Market index may tactically hurt portfolio flows, while exporters declined on the rupee's strength.

U.S. index provider MSCI will announce later in the day whether it would push ahead with plans to include so-called China 'A' shares in its Emerging Markets Index, a decision that MSCI says would draw $400 billion to China stocks over time.

Foreign investors continued to sell amid worries over slow reforms, retrospective taxes and more recently competition for portfolio flows from China after potential inclusion of its 'A' shares in the MSCI emerging market index.

Analysts and fund managers, however, believe Indian equities have already priced in a higher weight for China in the MSCI index after falling nearly 12 percent from their record highs hit in March.

"MSCI decision might be a tactical change for markets but not for India's domestic economy," said G. Chokkalingam, founder of Equinomics, a Mumbai-based research and fund advisory firm.

The BSE Sensex fell 0.3 percent, and is heading towards its lowest close since Oct. 20, 2014.

The Nifty lost 0.2 percent, on track towards its lowest close since Oct. 27, 2014

Foreign institutional investors have sold in four of the last five trading sessions, withdrawing about $316 million from Indian cash equities, regulatory and stock exchange data showed.

Overseas funds withdrew a net 57 billion rupees ($889.9 million) from shares last month, when markets were gripped by worries about a potential retrospective minimum alternate tax (MAT).

Lower global stocks on speculation the U.S. Federal Reserve could raise interest rates sooner than many expect also weighed on sentiment.

Exporters led the declines. Sun Pharmaceutical Industries fell 1.9 percent while Cipla lost 3.2 percent.

Infosys fell 0.4 pct while Wipro lost 1.7 percent.

(Reporting by Abhishek Vishnoi; Editing by Biju Dwarakanath)