MUMBAI (Reuters) - The BSE Sensex fell 5.8 percent on Monday in its biggest drop in six months after the annual budget disappointed investors and raised concerns about the government's finances.
Banks were among the big losers as a higher fiscal deficit and borrowing plan sent bond yields sharply higher, which could hurt treasury income for lenders.
The budget fell short of expectation on infrastructure spending, ignored financial sector reform, raised a minimum alternate tax for companies and set a paltry stake sale target unnerving investors, traders said.
"There is a mismatch between market expectations and what was delivered. There were hopes the government would be bolder, but it has only gone for spending," said Deepak Jasani, head of retail research at HDFC Securities
"On most counts, there are a lot of general statements of intent, without any specific targets or timelines."
The 30-share BSE index ended 5.83 percent lower at 14,043.40, its sharpest fall since Jan. 7 when it slumped 7.25 percent after Satyam Computer Services, now renamed Mahindra Satyam, unveiled a billion-dollar accounting scandal.
It was the lowest close since May 26. The index had risen as much as 1.2 percent early.
The benchmark is still up three-fourths from its 2009 low in early March.
Investors had betted on a market-friendly budget after Prime Minister Manmohan Singh's ruling coalition was re-elected in mid-May with a bigger mandate. The BSE index soared a record 17 percent on one day after the election verdict, and is still up
15.4 percent since that result.
Finance Minister Pranab Mukherjee said the fiscal deficit for 2009/10 was expected to rise to a 16-year high of 6.8 percent of gross domestic product from 6.2 percent in the last fiscal year.
Except for two stocks all other components in the index fell as a sharp 21 basis points jump in bond yields posed a challenge to cheap credit for companies.
Some traders said the fall was overdone.
"I think the market seems to be over-reacting. There's definitely disappointment ... (but) at the same time there are welcome announcements focusing on infrastructure," said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management.
Diversified ITC bucked the trend and rose 3.1 percent to 197.8 rupees as the budget left taxes on its main product, cigarettes, untouched. Hindustan Unilever rose 1 percent to 275.90 rupees.
Bank shares led the slide on concerns high bond yields would dent treasury income for lenders.
Commercial banks in India are required to hold at least 24 percent of their deposits in government securities and profits from trading in bonds form a substantial part of their revenue.
A sharp drop in bond prices, which move inversely to yields, would lower the value of bond holdings for banks.
Traders said sentiment was also hit after the finance minister was silent on raising foreign investment limit in insurance firms to 49 percent from 26 percent. Most banks run insurance joint ventures.
Top lender State Bank of India dropped 8.6 percent to 1,655 rupees, No. 2 ICICI Bank fell 10.1 percent to 678 rupees -- both registering their sharpest fall since March
Top mortgage firm Housing Development Finance Corp fell 9 percent to 2,353.55 rupees.
The budget increased allocation for highways by 23 percent and said state-owned India Infrastructure Finance Co would refinance loans of commercial banks but remained silent on equity capital requirements.
"This is a vision without milestones, which does not communicate much," said A Subba Rao, group chief financial officer at GMR Infrastructure.
"They have eased financing through debt but they have not provided for equity flows for projects."
Top construction and engineering firm Larsen & Toubro fell 8.9 percent to 1,464 rupees, its sharpest fall in nine months.
A paltry target of 11.2 billion rupees for stake sale in state-run firms also upset investors and they punished government firms such as Oil and Natural Gas Corp and Bharat Heavy Electricals.
"The target has disappointed investors big time. They were looking at a low five-digit target in the worst case," said Sanjeev Patkar, head of research at Dolat Investments.
In the broader market losers swamped gainers by more than 3 to 1 on high volumes of 544.8 million shares.
The broader NSE Index fell 5.8 percent to 4,165.70 points, its sharpest fall in six months.
* Unitech Ltd on 26.5 million shares
* Suzlon Energy on 22.1 million shares
* GVK Power on 19.6 million shares
* Titan Industries rose nearly 3 percent to 1,237.80 rupees after the budget scrapped excise duty on branded jewellery.
* A rise in minimum alternate tax, a levy to ensure companies did not avoid tax by claiming exemptions, hit firms such as energy giant Reliance Industries and top telecoms firm Bharti Airtel.
Traders said these firms could see their earnings eroded by the tax. Reliance shares fell 6.5 percent to 1,893.60 rupees and Bharti dropped 4.1 percent to 783.60 rupees.
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