The FTSE retreated from last week’s 21-month high this morning, after Wall Street snapped an eight-day winning streak on Friday following India’s decision to unexpectedly raise interest rates.

On Friday India’s central bank raised its reverse repurchase rate to 3.5% from a record-low of 3.25% and the repurchase rate to 5% from 4.75% in order to contain rising inflationary pressures. The move shocked the market because it took place ahead of the next policy meeting, underscoring the urgency of the matter.

The move also represents the beginning of a major shift in global policy, with China also expected to start tightening and ending certain stimulus programmes in order to avert domestic asset bubbles. Although interest rates are expected to remain low for a while longer in Europe, the US and the UK, these economies will have to start slashing government expenditure and reining in certain stimuli in order to lower their burgeoning budget deficits and hang on to their sovereign debt ratings.

The removal of economic stimulus programmes and the prospect of additional policy tightening are leaving the global economy vulnerable to a renewed dip into recession – this risk is being priced into equity markets.

Over the weekend, the first deputy managing director John Lipsky of the International Monetary Fund said advanced economies face ‘acute’ challenges in tackling high public debt, and unwinding existing stimulus measures alone will not bring deficits back to prudent levels. All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100% by 2014, Lipsky said in a speech on Sunday at the China Development Forum in Beijing. ‘This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,’ Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.

Elsewhere, Germany’s reluctance to commit to a Greek bailout plan is casting doubt about the country’s ability to meet its sovereign debt repayments.

In an interview with Deutschlandfunk radio station, Germany’s chancellor Angela Merkel warned against raising ‘false expectations’ of a eurozone bail-out package for the Greek government. Her remarks seem to clash with those put forth by the Greek Prime Minister George Papandreou and European Commission President Jose Barroso, who urged the EU to provide the details of a Greek rescue plan at the March 25-26 summit in Brussels.

At the same time Ms Merkel said tougher sanctions were needed to police budget discipline in the eurozone and that countries should be expelled from the monetary union if they persistently break the rules.

A report from the Confederation of British Industry (CBI) also weighed on market morale today. The business group warned the UK economy will remain weak until the middle of next year and that domestic economic growth would remain fragile due to the reining in of stimulus measures. The CBI expects UK consumer spending to also remain subdued this year due to challenging labour market conditions.

By around 10:30am (London time), the FTSE 100 was trading at 5589.79, representing a 60.33-point (-1.07%) decline, while the broader FTSE 250 retreated 81.92 points (-0.82%) to 9937.85.

Miners took the most points off the FTSE this morning, with losses across the sector ranging between 1.4% and 3.4%, following weakness in underlying commodity prices.

April Gold futures slid 0.3% to $1,104.6 per troy ounce this morning and May high-grade copper futures sank nearly 1% to $3.3415 per pound. In addition, May light-sweet crude oil declined 1% to $80.14 a barrel following gains in the US dollar.

Energy majors were also out of favour, with Tullow Oil down 2.5% to 1232p and Cairn Energy 2.1% lower to 625.2p. Shell fared marginally better than its sector peers, falling only 1% after the company, along with PetroChina, agreed to acquire Australia’s Arrow Energy for $3.2 billion.

‘Arrow’s assets in Australia are located in close geographical proximity to Asia and the reserves are of a very significant scale,’ said John Young of Wilson HTM Investment Group. ‘They are world-scale, it’s material to companies as large as Shell and PetroChina.’

Banks also lost traction, with Barclays and Standard Chartered both down by 1.7% to 351.6p and 1741p respectively. Lloyds Banking Group retreated 1% to 59.5p while Royal Bank of Scotland fell 0.4% to 43.82p. According to the Financial Times, Richard Branson’s Virgin Group has secured finance to bid in the sale of 320 RBS branches.

Elsewhere, Interdealer broker ICAP fell 1.7 per cent to 384.8p after it announced that it was closing parts of its cash equities business, as part of its restructuring exercise. The company said the closure would affect 114 jobs and result in a £51 million one-off charge in the current financial year.

Looking ahead to the US, June Dow and S&P 500 futures traded between 0.6% and 0.7% lower, suggesting that Wall Street may open in negative terrain this afternoon.

Investors should keep an eye out for drug makers and health insurers, which are likely to rally after the Democrats won a historic healthcare vote on Sunday.

‘The hospital industry is a winner,’ said John L Sullivan of Leerink Swann in a phone interview on March 19. ‘The drug industry is probably a bit better off. The device industry could be a bit worse off. The biotech industry is relatively unscathed. And for managed care I think it’s a function of what happens with the individual mandate and how easy or hard it is to keep healthy people in the insurance pool.’ Pfizer and smaller drugmakers stand to benefit from the health care reform because broader access to insurance means more people can afford to keep taking their medicines.