Foreign investors sold around $630 million in Indian shares and bonds on Wednesday, marking the biggest single-day sales since January 2014.
As per preliminary depositary data, it was the biggest single day sell-off since foreign investors sold around a net $877 million on January 27, 2014, when emerging markets suffered from withdrawals sparked by fears of the US Federal Reserve raising interest rates.
Shares and bonds have wiped out entire gains for the year over the past few weeks, with the Nifty down 11 percent since hitting a record high on March 4.
The foreign funds' selling spree is being attributed to the uncertainty created by the minimum alternate tax (MAT) that is being demanded from some overseas portfolio investors.
A major tax controversy erupted last month with foreign institutional investors (FIIs) over demands for $95 million on past capital gains.
According to depository data last week, FIIs are set to break an 11-month streak of net inflows into the Indian debt market, having turned net sellers in April for the first time since April 2014.
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Net outflows till April 27 have been Rs.817 crore - in the wake of recent tax notices demanding tax at 20 percent on interest income, as opposed to five percent without minimum alternate tax (MAT).
The Indian government plans to set up a high-level committee to sort out taxation issues of the past and make the system predictable, Finance Minister Arun Jaitley said last week.
"I am considering a high-level committee to explore what can be done to resolve the past and move beyond it in a way that would provide real predictability and certainty to investors," he wrote in an opinion piece in the Financial Times.
Meanwhile, the rupee on Thursday fell to its lowest since September 13, 2013, going below Rs.63.90 to a US dollar.