The BSE Sensex fell 1.1 per cent on Tuesday to its lowest close in more than five weeks after a setback to the Congress party in state elections sparked worries the results would make it harder for the government to revive economic reforms.
The Congress party, which heads the coalition in New Delhi, was trailing in fourth place as vote counting neared its end in the politically important Uttar Pradesh.
"One thing that is very clear is there will obviously be a policy dilemma," said Sam Mahtani, a London-based fund manager for F&C Asset Management, which owns Indian shares worth $350 million.
"With these kinds of election results, the government may want to be a bit more populist in the next 18 months. That will put pressure on the fiscal deficit, which means we are not going to get the scope of interest rate cut that we are hoping for."
New Delhi has been on the back foot to push policies like opening up the retail sector and to raise the limit on foreign investment in insurance firms needed to shore up economic growth.
Goldman Sachs said in a report it viewed the poll results as negative for economic reforms and the markets.
"We think the results will not provide the political space for the government or the confidence to carry through unpopular reforms. We think the best that can be hoped for is muddle-through policies by the government," it said.
The main 30-share BSE index shed 1.09 per cent, or 189.58 points, to 17,173.29, its lowest close since January 30. Twenty-one of its components fell.
Maruti Suzuki bucked the trend and rose 1.3 per cent after Credit Suisse upgraded the top automaker to outperform from underperform, citing expectations for higher sales and margins for the fiscal year starting on April 1.
Trading was choppy with the index rising 1.9 per cent at one stage and then falling as much as 1.4 per cent.
The benchmark is down nearly 7 per cent since February 21, when it climbed to its highest close in nearly seven months. Still, the index is up 11 per cent so far this year, helped by strong foreign fund inflows.
Reliance Leads Fall
Energy conglomerate Reliance Industries Ltd (RELI.NS) led the drop, ending the day down 2.6 per cent at Rs 776.55. The stock had risen more than 18 per cent in the first two months of this year in a liquidity driven broader market rally.
Analysts said market sentiment was also dented by overseas bourses, which were hit by concerns over slowing economic growth in China and Europe and the risks of Greece failing to complete a debt deal restructuring deal.
Rising oil prices is also a concern for India, which imports nearly 80 per cent of its crude oil. Brent crude held above $123 in volatile trade on Tuesday. It hit a 3-1/2 year high of $128.40 last week.
High oil prices are fast replacing Europe as the biggest danger to growth in Asia, threatening to smother consumer demand while taking a knife to exports and reigniting inflation, analysts said.
Top lender State Bank of India dropped 1.3 per cent and No. 2 ICICI Bank lost nearly 2 per cent amid an institutional sell-off in heavyweight equities. The stocks are still up more than a quarter this year.
"SBI and ICICI Bank had a good rally year-to-date, so there is some profit-taking happening. But you can still argue a case for hanging on to these stocks and buying on any correction," Mahtani said.
The 50-share NSE index ended down 1.1 per cent at 5,222.40. In the broader market, there were more than 2 losers for every gainer on strong volume of about 882 million shares.
Stocks That Moved
* AstraZeneca Pharma jumped as much as 19 per cent on reports parent AstraZeneca is considering options for its Indian unit, including buying the remaining 10 per cent in order to secure full ownership in a key emerging market. It closed up 0.5 per cent.
* Subex dropped 2.7 per cent to Rs 28.90. The technology services provider to telecom companies said its dollar convertible bondholders approved extension of the maturity period by four months from March 9.