Mumbai, March 4: The US sub-prime credit crisis isn’t such a distant story after all: on Tuesday, the stock markets were spooked by reports that the turmoil had enveloped ICICI Bank, which was later hotly denied.

The drama began early in the day after P.K. Bansal, the minister of state for finance, told the Rajya Sabha in a reply to a question that the country’s largest private sector bank had totted up mark-to-market losses of $264.34 million as on January 31 because of its exposure to the crisis.

The first hint of an Indian entity’s exposure to one of the worst crises in the banking industry shook the stock markets: the sensex plummeted to its lowest level in 2008 at 16339.89, a fall of 337.99 points from Monday’s close.

The ICICI Bank stock, which has a 10 per cent weightage in the sensex, initially tumbled 10 per cent. The bank scrambled to set the record straight. In a statement to the bourses, it claimed that it had no direct or indirect exposure to the US sub-prime credit market. It, however, confirmed that it had exposure to some credit derivatives (where the underlying instrument is debt).

The market steadied a little after that, but the ICICI Bank stock closed the day lower by 5.16 per cent.

In a long-winded explanation, the bank said the widening of credit spreads resulted in a “negative” mark-to-market impact on the credit derivatives of the bank and its overseas subsidiaries, though there had been no deterioration in the credit quality of the underlying investments.

ICICI Bank and its overseas banking subsidiaries have an aggregate exposure of $2.2 billion to credit derivatives. As of January 31, the mark-to-market negative on this portfolio was about $155 million. Of this, the bank and its subsidiaries have made a provision of $88 million in its accounts for the nine months ended December 31, 2007.

ICICI Bank and its overseas banking subsidiaries had some fixed income investment portfolios that had registered a mark-to-market loss. As of January 31, this loss was about $108 million in the subsidiaries. Of this, a sum of $101 million had been accounted for in the financial statements as of December 31, 2007.

Officials said the bank would book a mark-to-market loss of $70 million on its investments in this quarter and that it had accounted for a loss of about $90 million up to December 31, 2007. There is a fear that the crisis might envelop other banking entities as well.

Banks such as ICICI Bank have increased their focus on international markets as demand for loans in India have sagged because of high interest rates. Although Indian banks are unlikely to have a direct exposure to the US sub-prime market, experts feel there can be more disturbing news in the months ahead. “We haven’t heard the last of it,” said an observer.

The State Bank of India, the Bank of India and Bank of Baroda also have exposures to credit derivatives. However, experts believe the combined exposure will be less than $1 billion.

The markets are roiled by a stream of negative global cues and finance minister P. Chidambaram’s decision to raise the short term capital gains tax to 15 per cent. “The sensex is largely driven by bank stocks, and any negative sentiment on this front will affect the market,” said Hitesh Agrawal of Angel Broking.