Mumbai: Indian benchmark indices posted their biggest daily percentage decline in 10 months on Friday, as a North Korean threat to carry out a hydrogen bomb test in the Pacific Ocean rattled global markets.

The Indian government’s stimulus spending plan and jitters that it would widen the fiscal deficit also contributed to the decline, which was led by bank stocks.

The National Stock Exchange’s 50-share Nifty index dipped 1.56% to close below the psychological 10,000-point mark at 9,964.40 points. The BSE Sensex tumbled 1.38% to end at 31,922.44 points.

North Korea struck back at US President Donald Trump’s threats to destroy it, with Kim Jong Un warning of the “highest level of hardline countermeasure in history" and his foreign minister suggesting that could include testing a hydrogen bomb in the Pacific Ocean.

“The markets saw a sell-off of over 1%, which in our opinion is on account of weak global cues, which were due to geopolitical tensions surrounding North Korea," said Nitasha Shankar, senior vice-president and head of research at YES Securities Ltd. “The sell-off was more pronounced as foreign institutional investors (FIIs) continued to pull funds out in reaction to the political tensions and recent revision of China’s sovereign rating."

Stock indices in Hong Kong, South Korea and Taiwan also fell around 1% on Friday but the decline in India was the sharpest among Asian markets.

Indian stocks are the most expensive among peers, prompting concerns about valuations overshooting fundamentals amid slow economic growth and an elusive corporate earnings recovery.

“Impact of good and services tax (GST) could be more prolonged and earnings recovery could be delayed by a quarter or two. As a result, a market correction at this juncture should not come as a surprise," said Ravi Gopalakrishnan, head of equities at Canara Robeco Mutual Fund.

The price-to-earnings ratio for FY19 is 18.48 and 18.18 for the Sensex and Nifty respectively, whereas that for MSCI Emerging Markets is 12.76 and MSCI World 16.50.

Analysts described the correction in the Indian markets as healthy and long overdue. “The correction was required due to excessive optimism built over the months. The sell-off is triggered by Fed’s comments on unwinding the quantitative easing beginning next month, consequence of which is unknown. Fed action will support the dollar which has already started to recover. As the Indian currency weakens against the dollar, it may have a negative effect on markets," said Jimeet Modi, chief executive of Samco Securities.

Most stocks in the capital goods, healthcare and metals sectors were under pressure on Friday. Among sectoral indices, the BSE Metal index fell 3.9%, reacting to China’s credit downgrade by S&P Global Ratings, triggering concerns that demand from the world’s second-biggest economy may decline.

So far this year, FIIs have bought a net $6.4 billion worth of stocks, but sold $761.55 million worth of Indian equities in September.

Reuters contributed to this story.