Sensex falls; capital ratio risks hit banks

The BSE Sensex posted its biggest fall in nearly three weeks on Thursday after a slump in the rupee exacerbated worries about India's fiscal and economic challenges, as well as about foreign selling on the back of recent tax proposals.

Banking shares led the fall a day after the Reserve Bank of India issued guidelines imposed core capital ratios of at least 7 percent, sparking concerns about return on equities in the sector.

Analysts have been ringing alarm bells about India's outlook, with Morgan Stanley warning on Thursday that India faces a "high" risk of a "shock" in its balance of payments.

On Thursday the rupee dropped to a four-month low against the dollar, sparked by concerns about foreign flows and the country's widening current account deficit.

The finance ministry will present a controversial bill to parliament next week that contains taxation provisions under the so-called GAAR rules, which have caused alarm among foreign investors.

"People have lost interest in India, even domestic funds are quiet" Prashastha Seth, Senior Fund Manager at IIFL Wealth said.

"Clarity on GAAR and government action than words are required" he said.

The benchmark 30-share BSE index fell 0.87 percent to 17,151.19 points, its biggest daily fall since April 13.

The 50-share NSE index ended down 0.97 percent at 5,188.40 points.

Foreign investors have sold a net of about 6.3 billion rupees in April, though they remain net buyers of about 433 billion rupees in the year-to-date.

Banks were among the leading decliners on Thursday, with the NSE Bank index ending down 1.75 percent.

The RBI introduced new rules on Wednesday to get banks to comply with upcoming Basel III rules, which some brokerages, including Sharekhan, warned would hit leverage levels and ROEs.

Private lender Axis Bank lost 4.07 percent and ICICI Bank fell 2.8 percent.

Two-wheeler Hero MotoCorp dropped 7.7 percent after missing earnings estimates, and on worries about the impact from the expiration of a state tax exemption it currently enjoys in Haridwar of northern India.

The chairman of IRB Infrastructure Developers said he was being investigated for possible involvement in a murder case, confirming a media report that sent shares of the mid-sized road developer down 10.8 percent.

However, software services exporters gained on expectations the slide in the rupee would improve profit margins at a time of waning outsourcing demand.

Infosys gained 0.4 percent, while Tata Consultancy Services gained 1 percent.

Shares in Indian sugar producers surged after the government removed any limits on export volumes, raising expectations for improved profits in the sector. Shree Renuka Sugars rose 4.4 percent.