The Thai stock market yesterday slumped almost 3 per cent on the continuing sell-off by foreign investors across Asian stock markets, daunted by a possible interest-rate increase in the US.

Foreign investors sold Thai shares worth a net total of Bt5.65 billion - the highest value so far this year.

India's main stock exchange halted trading for an hour yesterday, after its benchmark index plunged 10.1 per cent. South Korean share prices closed down 2.46 per cent, Taiwanese down 1.92 per cent, Japanese down 1.84 per cent and Hong Kong down 3.11 per cent.

The Stock Exchange of Thailand (SET) Index started the market with a tumble and headed further south to the day's trough at 722.81, a 3.15-per-cent drop, before recovering slightly to end the day at 724.44. Turnover was moderate at Bt17.6 billion.

Last week, foreign investors alone sold Thai shares with a net worth of Bt14 billion. Yesterday, they sold an additional net total of Bt5.65 billion worth of Thai shares.

Thai shares have dropped 7.42 per cent since May 11.

Advanced Info Service Plc was off 6.63 per cent at Bt91.50, Shin Corp Plc fell 5.67 per cent to Bt33.25, PTT Exploration and Product Plc dropped 4.31 per cent to Bt111, Siam Commercial Bank (SCB) declined 2.44 per cent to Bt60 and Kasikornbank was down 2.33 per cent at Bt63.

SET executive vice president Sopawadee Lertmanuschai rushed to allay the market's jitters by saying the steep fall in Thai shares was not unusual and was also happening among the SET's regional peers, as foreign investors adjusted their investment portfolios.

She said it would be short-lived phenomenon.

"The foreign selling spree has made an adverse impact on the Thai stock market, as their ratio in the daily average trading volume accounts for 30-40 per cent now, from 20 per cent in the past," she explained.

Siam City Securities said foreign investors had mitigated their risk by dumping stocks across Asian bourses and shifting their money into long-term bonds.

The brokerage said the selling pressure had resulted in volatility and predicted the SET Index would probably drop to 720. Bank of Thailand deputy governor Bandid Nijathaworn warned local investors to be careful about their investments at this time, because the inflow of funds started to hiccup this month.

"From January to April, there was an obvious inflow from foreign investors, mainly due to the depreciation of the US currency. But now, foreign investors have reconsidered the risk in investing in emerging markets in Asia, as they are not so sure about the trend of inflation in the US," said Bandid.

Kasikorn Asset Management chairman Piyasvasti Amranand said the market had remained volatile and risky in the past week, but investors should not panic, because it was happening throughout the global stock markets.

He said that in the second half of the year, inflation would tend to decline.

Citigroup remains underweight in Thailand, with an SET target this year of 725 points.

"There are three myths that partially explain why foreign investors have been so positive on the Thai market. First, Thai interest rates have peaked; second, locals will soon return and drive up the market; and third, the market is cheap and will rerate soon," stated a Citigroup research report.

Foreign investors have been net buyers of nearly US$7 billion (Bt269 billion) worth of Thai shares since December 2004 and $3 billion so far this year.

Citigroup estimated the 14-day repurchase rate would peak at 5 per cent, from 4.75 per cent at present.

Although the Thai political situation is likely to remain in turmoil for the rest of the year, Citigroup does not think it can get worse, and it sees only an upside for the market in regard to politics.

JP Morgan said in a note it remained neutral on the Thai stock market. "We expect to see more specific negative event drivers over the  next three months, in terms of political developments and macro- and microgrowth forecasts.

The political uncertainty could last another 12-16 months, which could undermine domestic demand, with investments most vulnerable. An oil-price resurgence poses a threat to consumer and business confidence and corporate margin recovery, making earnings upgrades look improbable," the paper said.