FIIs pull down Sensex 678 pts

Index sees one of its biggest declines since October 18.

Indian stocks joined the general downtrend in other Asian markets on Wednesday with the benchmark 30-share Sensex posting its biggest decline in a month after crude oil approached $100 a barrel and the Federal Reserve cut its forecast for US economic growth from 2.5-2.75 to 1.8-2.5 per cent.

The recovery in the US markets yesterday didn't have a rub-off effect and the Sensex lost 678 points, or 3.52 per cent, to close at 18,602 points.

The index had one of it biggest declines since October 18 when it lost 717 points and the Sensex posted a five-day drop of 1,326 points, or 6.7 per cent.

The 50-share Nifty lost 219.85 points, or 3.80 per cent, to close at 5,561 points.

All Asian markets, except Pakistan, were down, led by Hong Kong, which shed 4.15 per cent on Wednesday.

Several large foreign institutional investors (FIIs) sold on Wednesday. Overall, FIIs' net sales were Rs 2,007 crore. In the last two days, their net sales in the secondary market stood at Rs 3,800 crore or nearly $1 billion.

Jignesh Desai, head of institutional sales at SBI Caps, said big buy orders from FIIs can be expected only in the new year.

Technical analysts said the 5,500 support for the Nifty will be crucial. Any fall below that will accentuate selling by retail investors.

The BSE mid-cap index also lost 4.73 per cent and the small-cap index 3.98 per cent on profit sales.

The stocks of power firms, banks, refineries, and capital goods companies were the major losers. ICICI Bank fell Rs 64.15, or 5.5 per cent, to Rs 1,103.10 and Reliance Industries declined Rs 64.85, or 2.3 per cent, to Rs 2,722. The two stocks account for about a quarter of the Sensex's weight.

Analysts said the US markets went up because the Fed has only talked about a slowdown and not recession (defined as two consecutive quarters of falling production). But all Asian markets lost ground as any slowdown in demand in the US, the world's largest economy, means lower exports.

The falling US currency and falling interest rates in the US have also made the yen carry trade "" borrowing in cheaper yen to finance stock purchases "" less attractive and the unwinding of this trade contributed to the Asia-wide sell-off.

Analysts said that, earlier, fears of a US recession had attracted investments in India which was considered a safe bet. But with recession fears receding, concerns have suddenly been raised about high valuations of Indian stocks.

Citigroup said current valuations look comparable with the Japanese market in 1990 and Nasdaq in 2000. A bubble-like situation is emerging in Asia, barring Japan.

Citi said that China and India are currently traded at very high multiples. It said China is more expensive as it is trading at a PE multiple of 50 against the US at 13 and Japan at 17. India is trading at a PE of 25.9.