By Manoj Dharra
MUMBAI (Reuters) - The BSE Sensex closed down nearly one percent on Wednesday, reversing previous session's gains with banks declining on worries of a rise in cost of funds and heavy government borrowing in the first half of next fiscal year starting in April.
Traders also attributed the decline in the indexes to portfolio positioning by domestic institutional investors ahead of the fiscal year-end this week and derivatives expiry on Thursday, the last settlement for the fiscal year 2011-12.
Domestic institutional investors were net sellers of 2.9 billion rupees of equities on Tuesday, according to the provisional data from NSE.
"There is no real investor in the market because, on the policy making point of view, we may have hit a road-block," said Jagannadham Thunuguntla head of research at SMC Investments and Advisors Ltd.
The main 30-share Bombay Stock Exchange Sensex ended down 0.8 percent at 17,121.62 and the National Stock Exchange's fifty share Nifty 0.92 percent at 5,194.75.
State-run State Bank of India, the top lender in the country, raised interest rates on short-term deposits by up to 100 basis points on Tuesday. Investors expect other banks to follow the leader, which is likely to pressure their margins.
In addition, Indian banks have also been facing acute cash crunch in the absence of adequate government spending following the outflow of advance taxes estimated at around 700 bln rupees earlier this month.
The liquidity tightness is evident from banks' daily repo borrowing from the central bank, which hit a record high of 1.96 trillion rupees on Monday.
SBI fell 2.3 percent, while top private lender ICICI Bank and smaller rival HDFC Bank declined 2.1 and 1.4 percent. The BSE banking index, which has risen 25 percent so far in 2012, ended 1.86 percent lower.
The government plans to raise 3.7 trillion rupees through bond sales during April-September, 65 percent of its gross borrowing target of 5.7 trillion rupees for 2012/13.
The benchmark bond yield rose to 8.63 percent intra-day due to oversupply fears. The adverse impact of higher bond yields on banks' treasury profits also dented the outlook for the sector.
Shares in UB group companies, except Kingfisher Airlines , rose after news channel CNBC TV18 reported Heineken may buy 12-13 percent of Chairman Vijay Mallya's stake in United Breweries , traders said.
Heineken already owns 37.5 percent in United Breweries.
United Spirits , United Breweries and UB Holding ended 1.5-4.8 percent higher.
Oil explorers Oil and Natural Gas Corp , Oil India and Cairn India fell 2.3-4 percent on concerns of higher under-recoveries, cess and subsidy burden.
(Editing by Rajesh Pandathil)