Sensex slumps to four-month low on algorithmic trading-related selloff

MUMBAI (Reuters) - The BSE Sensex and Nifty fell more than 2 percent on Wednesday to their lowest in four months, on strong selling on algorithmic trading platforms, while continued offloading by foreign investors amid retrospective tax worries also weighed.

Dealers said the sell-off was initially sparked by a slump in Nifty futures listed on the Singapore exchange, which are now trading at a discount to domestic Nifty futures.

Algorithmic trading accounts for a third of the total volume on Indian cash shares and almost half of the volume in the derivatives segment, analysts said.

Traders are bracing for more volatility, with India VIX, often called the fear gauge, surprisingly rising alongside stock market bounces. India VIX surged as much as 15.6 percent on Wednesday.

"Nifty was already below 200-day average and today it also broke Tuesday's low which generated strong selling on algo platforms," said Nilesh Dedhia, founder of NTD Trading, which specialises in providing algo-based trading platforms.

The BSE Sensex fell up to 2.1 percent, while the broader Nifty lost as much as 2.2 percent, heading towards their steepest daily fall since March 26.

Both indexes marked their lowest intraday level since Jan. 7.

Meanwhile, the SGX index future for May expiry was down 2.04 percent.

The recent falls have come amid continued worries about selling by overseas investors, who have offloaded shares worth a net of more than $1.7 billion in the last 13 sessions excluding the amount raised from Daiichi Sankyo's stake sale in Sun Pharmaceutical Industries .

Analysts have widely cited the uncertainty sparked by a so-called minimum alternative tax that is being demanded from some foreign investors, as a key concern.

Junior Finance Minister Jayant Sinha last month said notices had been issued in 68 cases, with a total tax demand of 6.02 billion rupees ($94.61 million). But Finance Minister Arun Jaitley has estimated claims could eventually stand at as much as 400 billion rupees.

Aberdeen Asset Management has moved the High Court of Bombay in response to a claim for a MAT payment of about 2 million rupees for one of its funds, with a hearing now scheduled for next month.

($1 = 63.6100 rupees)

(Reporting by Abhishek Vishnoi; Editing by Subhranshu Sahu)