NEW DELHI • India's NSE index fell about 1 per cent yesterday to a seven-month low, erasing its gain for the year, as investors fretted that the government may impose long-term capital gains tax.

Prime Minister Narendra Modi said on Saturday that people in financial markets must make a "fair contribution" to nation-building, comments that were seen as setting up the prospect of higher taxes for investors.

However, Finance Minister Arun Jaitley clarified on Sunday that the government did not plan to impose long-term capital gains tax, though that was not enough to prevent selling yesterday.

Indian shares were headed for an eighth session of declines in nine, amid worries about outflows from emerging markets to the United States and continued concerns about India's move to ban higher-value currency notes.

"It (the reaction to the PM's comments) is a knee-jerk reaction," said Geojit BNP Paribas vice- president Gaurang Shah. "The fact that we have broken certain levels since the Brexit-day low could be spooking markets further."

The NSE index fell as much as 1.15 per cent to 7,893.80, its lowest since May 25. It was last down about 0.5 per cent for the year.

The benchmark BSE index was 0.87 per cent lower at 25,814.75, after falling as much as 1.1 per cent to its lowest since Nov 21 earlier in the session.

In another sign of nerves in the stock markets, the NSE's India Volatility index surged 8.3 per cent.

Banking stocks fell, with HDFC Bank and ICICI Bank among the biggest contributors to the decline. The NSE Bank index fell as much as 1.55 per cent to its lowest since June 29. Consumer and material stocks also dragged down the indexes, with the Nifty Metal index shedding as much as 2.8 per cent to its lowest in over a month.

REUTERS