Mumbai: Indian equities fell the most in three months on Wednesday, echoing markets around the world, as investors pulled money out of equities and sought refuge in risk-free assets after rating agency Standard and Poor’s (S&P) cut Greek debt ratings to junk status and downgraded Portugal.

Graphic: Ahmed Raza Khan/Mint

Also See The Greek Contagion (Graphic)

The Bombay Stock Exchange (BSE) Sensex fell 310 points, or 1.76%, to 17,380. The broader 50-stock Nifty index of the National Stock Exchange (NSE) fell 1.75% to 5,215.45 with investors cutting exposure to real estate firms the most.

“There is contagion risk possibility; but for now investors are awaiting further action (from euro zone governments)," said Ullal Ravindra Bhat, managing director, Dalton Strategic Partnership Llp, a foreign institutional investor (FII) registered in India.

On Tuesday, S&P cut the debt rating of Greece, an economy burdened with debt to the tune of 115% of its gross domestic product (GDP), and running a deficit of close to 13% of GDP, to junk status. The European Union and the International Monetary Fund (IMF) are trying to cobble a bailout package, but there is opposition in countries such as Germany and France. Fearing contagion or the spreading of this risk to other European markets, investors started fleeing from equities.

While the Dow Jones Industrial Average fell 1.9% overnight, Japan’s Nikkei index slipped 2.57%.

“Although the US was the epicentre of the global crisis, Europe was more deeply affected because of its economic openness, mutual trade and financial interdependence, and the relatively higher reliance on banks than capital markets as a source of credit," said ratings agency Moody’s in a study of sovereign defaults over the last 25 years.

One reason why investors are concerned about the crisis is that the larger issue here is not just about a bailout, but on the restructuring that will happen and the haircut—or portion of debt that’s waived off—that will have to be taken by Greece’s debtors. If this spreads and larger European banks come under fire, the recovery in the West may be impaired, analysts said.

“If Greece defaults and becomes a contagion, then there are definitely medium-term and macro (economic) implications." said Vetri Subramaniam, head of equity funds at Religare Asset Management Co. Ltd that has about Rs13,000 crore worth of assets under management.

Wednesday’s fall is “part of a normal pattern in the last five months, when the Sensex has been trading in a range", he added.

Indeed, after doubling in a little under six months from its lows of March 2009, the index has gained some 2% since then, trading between the 15,000 and 18,000 levels.

NSE’s volatility index, or VIX, had fallen to lifetime lows in March. On Wednesday, it inched up marginally to 19.82, from 19.79 on Tuesday.

According to provisional data available with BSE, FIIs sold Rs131 crore worth of shares, compared with Rs324 crore purchases by local mutual funds and insurers. So far this year, FIIs have bought Indian stock worth $6.27 billion (Rs27,964.2 crore), giving a thumbs-up to the resurgent economy, which is forecast to expand at 8.8% in 2010, according to IMF.

Among BSE’s sectoral indices, realty, oil and gas, metal and consumer durables were the most affected, losing 2-3.6%. Reliance Industries Ltd, which has the heaviest weightage in the Sensex, slipped 4.16% to Rs1,017. ICICI Bank Ltd, India’s largest private sector lender, lost 2.93%, and the country’s largest steel producer, Tata Steel Ltd, fell 3.6% to Rs624.35.

“The India growth story is still intact; this is more of a localized risk aversion spilling to broader markets," said Deepak Lalwani, director of India investments at London-based Astaire and Partners Ltd. “On a valuation basis, India is treated as a growth market with a high premium attached. When such markets look fully valued, investors take some money off the table" at the hint of such crises.

Ashwin Ramarathinam and Reuters contributed to this story.