In an extremely volatile trading session, certain stocks, especially of capital goods and realty companies, fell as much as 30 per cent from their day’s highs, as investors judged recent gains excessive. A lot of domestic cyclical stocks have gained more than 50 per cent in recent weeks over the expectation that a Narendra Modi-led central government would take steps to revive economic growth.

On Monday, the day Modi was to be sworn in as prime minister, the Sensex dropped 740 points from its day’s high of 25,175 before recovering a little to close at 24,716.9, a gain of 23 points on its previous close.

This was the second time the market saw a sharp sell-off after trading above the 25,000 level. A similar movement was seen on May 16, when the election results revealed Modi’s Bharatiya Janata Party had won a clear majority.

“After such a sharp rally, it was expected the market would cool off a bit. The sharp fall was partly due to profit booking and confusing signals on ministerial appointments,” said Dalton Capital Advisors Managing Director U R Bhat.

The NSE Nifty also retreated from its day’s high on 7,504 to close at 7,359, a decline of eight points from its previous close. The Nifty has lately made two failed attempts to close above the psychological 7,500 level.

“Profit booking was seen after Nifty crossed the 7,500 mark. It was expected, as stocks have run up as much as 50 per cent in a very short time. The kind of position build-up we have seen in stock futures is unprecedented,” said Yogesh Radke, head of quantitative research, Edelweiss Capital.

On Monday, foreign investors were net-sellers of Rs 84-crore stocks in the cash market, while domestic institutions sold shares worth Rs 200 crore.

In a sign of heightened volatility, several large index components, including BHEL, Tata Power and DLF, fluctuated 15 per cent during the day.

The India VIX index, a gauge of volatility and fear, shot up over 12 per cent. Analysts said the markets would keenly watch the official announcement on the next finance minister and also react to news on Cabinet formation.

The Sensex has risen 25 per cent since Modi, perceived as pro-development, was named the BJP’s prime ministerial candidate in September last year. During this period, several stocks, especially in the banking, capital goods and real estate sectors, have more than doubled their value.

Following the sharp run, the Indian market is now trading at a multiple of 15.5 times its one-year forward earnings, above its five-year average of 14.6 times. Analysts believe a reform push by the new government will lead to re-rating of the Indian market and it might trade 200-300 basis points higher than its historical averages.