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A cautious approach by investors saw the stock indices shed over two per cent on Tuesday.
The NSE Nifty slipped below the 5000-mark, to end at 4999.95. The BSE Sensex ended the day at 16,546, down 366 points from its previous close. The market fell steeply on the unresolved GAAR (General Anti Avoidance Rules) issue, concern over Europe's debt markets and the RBI Deputy Governor, Dr Subir Gokarn's remarks on the central bank's inability to cut rates further.
Analysts believe that FII movement will have to be monitored over the next few days to understand the full extent of the GAAR impact on FII flows.
Short-term relief
“For the short term, it has brought some amount of relief. However, it remains to be seen what form it will take next year and what changes will be incorporated.
“There should be a proper discussion paper and representation on the issue. In the next six to eight months, there should be more deliberation. It should be made a part of the Direct Taxes Code, so that in the future there is no going back and forth,” said Mr Mayank Khemka, Director, Portfolio Management, Head of Equities & Global MACS - India (Multi Asset Class Solutions), Credit Suisse.
FIIs were net sellers during the day at Rs 398 crore. Adding this to Monday's numbers, FIIs have sold shares worth Rs 1,000 crore, since the announcement of the postponement of GAAR.
Another reason that analysts attribute the decline to is the decision by the NSE to not accept clients' securities as collateral with the Exchange's clearing corporation.
Refusing to accept securities as collateral would mean that investors would be forced to exit their existing positions.
Europe, US impact
The European and US markets were down by around one per cent at the end of Monday's trading session as concerns regarding the European debt crisis continued to burgeon in the wake of the political changes sweeping the continent. The S&P Asia Index was down 2.3 per cent on Tuesday.
The decline in the markets was led by stocks in the capital goods, IT and banking sectors. Among the Sensex stocks, the top three gainers were Coal India, GAIL and Hindalco. The three key laggards were TCS, BHEL and ITC.
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