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Sensex Falls 257 Pts; Infosys Sparks IT Rout
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Global risk aversion also weighed, after a surprise rate cut from South Korea and a 50-basis point reduction in Brazil underscored the widespread nature of the current economic slowdown.
The worries over corporate earnings trumped data showing much stronger-than-expected growth in industrial output in May, given expectations the Reserve Bank of India will keep interest rates on hold for the time being.
However, what could have been a wider route was avoided after oil shares rallied on growing hopes India will raise diesel prices, which analysts say will be key in improving the country's fiscal outlook.
"Q1 will be disappointing. We can just hope it will not be a major disappointment," said Ashish Kapur, CEO of wealth management firm Invest Shoppe India Ltd in New Delhi.
"Infosys has reached a plateau and have to discover itself again. Auto and industrial goods numbers would be bitter as well."
The 30-share BSE Sensex fell 1.47 per cent to 17,232.55 points, and has fallen 2.2 per cent over Wednesday and Thursday.
The 50-share Nifty lost 1.34 per cent to end at 5,235.25 points.
The reversal threatens to end a strong rally seen since the start of June on the back of optimism the government was getting serious about policy reforms. Those gains took the BSE index to its highest close in nearly four months on Tuesday.
The outlook for markets will likely depend on the shape of corporate earnings, although investors are also closely eyeing potential policy reforms after presidential elections later this month.
Expectations for interest rates could also change depending on inflation data due out on Monday.
For now, pessimism prevailed on Thursday.
Infosys shares dropped 8.4 per cent, its biggest fall since April 13, after India's second-largest software services exporter cut its outlook for revenue growth in dollar terms to 5 percent in the fiscal year to March 2013, down from its prior estimate of 8-10 percent growth.
Larger rival Tata Consultancy services fell 1.8 per cent.
Among other decliners, shares in JSW Steel fell 1.9 per cent, while Mahindra & Mahindra fell 1.6 per cent after both stocks went ex-dividend on Thursday.
However, among gainers, shares in Oil and Natural Gas Corporation rose 1.6 per cent, while Hindustan Petroleum Corp advanced 3.3 per cent, and Bharat Petroleum Corp rose 1.1 per cent.
India is likely to raise diesel prices after a presidential election on July 19, a highly-placed oil ministry source said on Thursday, which confirmed an earlier report from the Business Standard newspaper that the government was looking at fuel reforms.
Shares in Bharat Petroleum Corp gained 1.1 per cent after announcing a consortium in which it owns a stake had discovered oil at the Espirito Santo Basin off the coast of Brazil.
Airline companies rallied on media reports the government is considering relief measures, including potential reforms in foreign direct investment and taxation for turbine fuel, for the industry.
Spicejet shares rose 1.3 per cent, while Kingfisher Airlines rose 0.5 per cent.