Sensex tanks 500 points on CIL sale, banks' woes

A sharp drop in banking stocks following weak results and Coal India's mega offering saw the markets post their 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 weight of nearly a third on benchmark indices. Market players said selling pressure accentuated as investors liquidated their positions to invest in the share sale of state-owned Coal India.

Ending its 10-day gaining streak, the NSE Nifty closed 143 points, or 1.6 per cent, lower at 8,808.9. The 30-share Sensex closed at 29,182.95, down 498.82 points, or 1.68 per cent, the most in three weeks. Despite the sharp cut on Friday, the benchmark indices ended the month with over 6 per cent gains, most since May 2014, when the Narendra Modi-led 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 liquidate 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 per cent lower, was the worst-performing banking stock in the Sensex, followed by ICICI Bank. Shares of the country's largest private sector lender fell nearly 5 per cent, most in 17 months, after it reported an increase in non-performing assets. Shares of BoB plunged 11 per cent after it reported a 69 per cent drop in earnings.

"People were expecting an 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.

Participants 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 per cent. Market players are eyeing the RBI policy meet on February 3 and the Union Budget to be announced on February 28 as the next big triggers. Analysts are also expecting an improvement in corporate earnings to support valuations. The Sensex currently trades at over 16 times one-year forward earnings, the most expensive since January 2011, according to Bloomberg.