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Sharp drop in banking stocks following weak results and Coal India's mega offering saw the Indian markets post its biggest drop in three weeks on Friday.
Earnings posted by ICICI Bank and Bank of Baroda raised asset quality concerns spooking banking stocks-which have nearly a third weightage in the benchmark indices.
Market players said selling pressure accentuated as investors sold liquidated their positions to invest in the Rs 22,000 crore share sale of state-owned Coal India.
Ending its 10-day gaining streak the NSE Nifty closed 143 points, or 1.6% lower at 8,808.9. The 30-share Sensex closed at 29,182.95, down 498.82 points, or 1.68%, most in three weeks.
Despite the sharp cut on Friday, the benchmark indices ended the month with over 6% gains, most since May 2014, when the Narendra Modi-government swept the general elections.
"The amount of funds that were required to participate in the Coal India issue was huge. To generate funds, investors had to liquate there existing positions. Banking stocks, which have rallied sharply, saw profit-taking," said Deven Choksey, managing director of KR Choksey Securities.
State Bank of India, which ended 5.13% lower, was the worst-performing banking stocks in the Sensex followed by ICICI Bank. Shares of the country's biggest private sector lender fell nearly 5%, most in 17 months, after it reported an increase in non-performing assets. Shares BoB plunged 11% after it reported 69% drop in earnings.
"People were expecting improvement in asset quality in the third quarter. However, it looks like asset quality issues for banks might continue for another three or four quarters," said S Krishna Kumar, head of equity, Sundaram Mutual.
Foreign institutional investors (FIIs) sold shares worth Rs 771 crore reversing their recent buying streak. Overseas investors have pumped in over $1.5 billion into Indian stocks so far in January.
Market players said the market faced stiff resistance and a correction was imminent following 10 straight days of gains -beginning January 15 when the RBI cut interest rates by 25 basis points-- during which the market rose nearly 7%.
Market players are eyeing RBI policy meet on February 3 and Union Budget to be announced on February 28 as the next big triggers for the market.
Analysts are also expecting an improvement in corporate earnings to support the market valuations. The Sensex currently trades at over 16 times one-year forward earnings, which is most expensive since January 2011 as per Bloomberg.
