Indian stocks dropped the most in two weeks, tracking losses in global equities, as concern mounted that the recent rally has outpaced the outlook for earnings growth.
The benchmark gauges are set for their first quarterly advance since March 2015, as global funds bought shares at the fastest pace since November 2014. The S&P BSE Sensex has risen 23% from its February low and its price-to-earnings ratio is near the most expensive level since January 2011. The valuation for a gauge of small-cap stocks is at a record.
“I’m not comfortable with the valuations as mid-caps are trading much higher than large-cap stocks,” AK Prabhakar, head of research at IDBI Capital Market Services, said by phone. “We’ve been anticipating a correction for a long time as the rally is not broadbased. People have been playing momentum stocks. It happens when we are near the peak.”
Losses in Indian equities deepened after European markets opened, with the Sensex falling as much as 1.4% to its lowest point of the day. The MSCI All-Country World Index fell for a second day as energy producers dragged equities lower around the world.
Yesterday’s downtrend in India may not linger as stocks will lure funds from local and foreign investors seeking high-yielding assets, IDBI Capital’s Prabhakar said. “People don’t have avenues to invest as gold and real estate are not performing.”
Overseas investors have bought $3.9bn of the nation’s equities this quarter, the highest inflow since the three months ended March 2015, data compiled by Bloomberg show. They’ve been buyers of local shares for a seventh month, the longest streak in two years.
Oil & Natural Gas Corp, India’s largest state-owned explorer, was the worst performer on the Sensex.
ICICI Bank and Tata Motors lost more than 3% each and were among the top losers on the benchmark. GNA Axles rose 18% in its trading debut.  
IFCI Ltd tumbled 5.4%, the steepest drop since August 8, after the nation’s top court ordered a probe into alleged irregularities at the company. Marksans Pharma Ltd jumped 11%, the most since July 20, after getting the US Food and Drug Administration’s nod for an antihistamine generic drug.  
Meanwhile, the rupee maintained its firmer undertone against the dollar for the third straight day yesterday and ended at 66.61 on sustained selling of the American currency.