Stock market sell-off wipes out 2015 gains; bonds falter

By Abhishek Vishnoi and Swati Bhat

MUMBAI (Reuters) - The BSE Sensex and Nifty slumped more than 2 percent on Wednesday to wipe out their entire gains for the year because of 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 trading at a discount to domestic NSE index futures.

The heavy selling in shares also hit bond markets, with the 10-year bond yield rising as much as 6 basis points to 7.92 percent, the highest since Dec. 29, 2014, according to Thomson Reuters data.

The sell-off signals the sudden bout of uncertainty gripping markets since April over the minimum alternate tax (MAT) that is being demanded from some foreign investors.

After rallying since early 2014, share indexes have wiped out their 2015 gains on the back of heavy selling by foreign investors. Preliminary data late on Wednesday showed overseas funds had net sold $268 million during the session.

"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 algorithm-based trading platforms.

The BSE Sensex fell 2.6 percent, while the broader Nifty lost 2.7 percent, closing at their lowest level since Dec. 17 and posting their biggest daily declines since Jan. 6.

Traders attributed the initial falls to heavy selling in Singapore which was later followed by over 9 billion rupees ($141.7 million) worth of NSE index May futures being sold in three minutes from 9.39 a.m.

That sparked some heavy selling in domestic shares, especially by algorithmic trades, which account for a third of the total volume on Indian cash shares and almost half of the volume in the derivatives segment, analysts said.

Bonds were also impacted, with pressure also coming from a sell-off in global debt markets. The benchmark 10-year bond yield closed 4 basis points higher on the day at 7.89 percent.

Uncertainty is expected to continue given lingering concerns over MAT. Overseas investors have offloaded shares worth a net of almost $2 billion in the last 14 sessions excluding the amount raised from Daiichi Sankyo's stake sale in Sun Pharmaceutical Industries .

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 ($94.6 million). But Finance Minister Arun Jaitley has estimated claims could eventually stand at as much as 400 billion rupees.

($1 = 63.5100 rupees)

(Editing by Subhranshu Sahu, Anand Basu and Biju Dwarakanath)