Retrospective taxation worries led to a selloff on the benchmark BSE Sensex and Nifty indices, which fell to their lowest points in the last four months. Strong selling on algorithmic trading platforms also added to the slump.
The Sensex and Nifty was down 2.5 percent Wednesday. The downward trend started with a plunge in the value of Nifty futures listed on the Singapore exchange. The futures are trading at a discount to domestic Nifty futures.
Algorithmic trading fuelled the fall as well. Such 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.
"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 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. ($1 = 63.6100 rupees)
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.
Minister of State for Finance Jayant Sinha last month said notices had been issued in 68 cases, with a total tax demand of Rs 602 crore ($94.61 million). But Finance Minister Arun Jaitley has estimated claims could eventually stand at as much as Rs 40,000 crore.
Aberdeen Asset Management has moved the High Court of Bombay in response to a claim for a MAT payment of about Rs 20 lakh for one of its funds, with a hearing now scheduled for next month.
(With inputs from Reuters)