Foreign investors sold a net $241 million worth of Indian stocks so far this week, contributing to a 0.46% decline in the rupee to 73.90 against the U.S. dollar. Meanwhile the yield on the benchmark 10-year government bond was little changed at 5.99%.

While the slump in stocks dragged down every industry, the S&P BSE Bankex, a gauge of bank stocks, fell further than the benchmark index to a three-month low.

“Banks will continue to under-perform in the next couple quarters,” said Amit Khurana, head of research at Dolat Capital Market Pvt. in Mumbai, “Bad loans will go up and they will be more retail and granular, which will be far more difficult to address than corporate loans.”

Eoin Treacy's view

Emerging markets are not immune to what happens on Wall Street because the rebound in the Dollar retracts support from international assets. Additionally, the move by the Modi administration to liberalise how farmers are allowed to sell their produce represents an inflationary uncertainty.

The Nifty Index is now testing the region of the trend mean but a clear upward dynamic will be required to confirm support in this area.

Government bond yields are still contained and the sequence of lower rally highs remains intact.

The Bombay Banks Index failed in the region of the trend mean and earlier this month and has now dropped to break the six-month sequence of higher reaction lows. A sustained move above 25,000 will ne needed to signal a return to demand dominance.

The underperformance of the banking sector is warning for investors because it has been a lead indicator for the wider market on so many previous occasions.