The benchmark Mumbai top-30 Sensex was down 5.01 per cent to stand at 4,240.21, a fall of 223.45 points from Friday, with selling across the board. Technical analysts say a decisive break through support at 4,200 could precipitate a slide below 3,900.

"When the markets will recover is a million dollar question," said Maulik Sharedalal, director at Kaji & Maulik Securities. The index has now lost around 15 per cent in the past seven trading days, down from a high of over 5,000 on July 13. Foreign funds have been trimming their exposure to India, and first quarter earnings from old economy stocks have disappointed. "The technical indicators are oversold, the reasonable support levels have been breached and we are standing below them," Sharedalal said. The Reserve Bank of India (RBI) on Friday raised banks' cash reserve ratio by 50 basis points to 8.5 per cent in two stages, and the bank rate by one percentage point to eight per cent.

The central bank also reduced limits available to banks for refinance facilities by 50 per cent. The thrust of package was aimed at restoring the interest spread between rupee assets and dollar assets, as US interest rates have been rising. The RBI hopes its measures will kill off speculation and persuade exporters to convert their earnings to rupees faster. But currency market analysts and bank treasurers say there is little speculation and the pressure on the rupee was a symptom of a deteriorating current account and slowing capital inflows.

There are also concerns the liquidity squeeze could bite despite the belief at the RBI that liquidity will remain comfortable for the next month to 45 days. Next week could provide the test as the first tranche of measures take effect and drain nearly 43 billion rupees of market liquidity. Sharedalal said Monday's share market fall was expected after the interest rate rise, but news the government had appointed a new head of the department handling privatisation also hurt sentiment because it showed lack of continuity in a key policy area.

Industrial growth was faltering even before the central bank jacked up interest rates. Data out two weeks ago showed industrial output growth slowed to 5.6 per cent in April and May from 6.2 per cent in the same two months last year. Worse still, April's growth was revised down to 5.68 per cent from an earlier estimate of 12.2 per cent. Bonds also suffered on Monday.

The market favourite 11.90 per cent 2007 bond was down at Rs 103.65/75 from early levels of Rs 104.20/25, and dealers said 10-year bond yields have risen nearly 45 to 50 basis points after the rate rise. Call rates reverted to a steady eight per cent, aftera kneejerk visit to 9.0-11.0 per cent at the weekend.

-- (Reuters)