Indian shares post worst day in 4 years as polls show unexpectedly narrow Modi win

By Sethuraman N R

BENGALURU (Reuters) -Indian shares plunged across the board on Tuesday, posting their worst session in more than four years, as voting trends showed Prime Minister Narendra Modi's alliance would fall short of a predicted landslide victory.

The NSE Nifty 50 sank 5.9% and the S&P BSE Sensex tumbled 5.7%, posting their steepest decline on an election outcome day since 2004.

The rout comes after the blue-chip indexes surged to record highs on Monday as exit polls had projected a much bigger margin of victory.

While the Modi-led National Democratic Alliance (NDA) will still likely form the government, analysts said the Bharatiya Janata Party (BJP) winning fewer seats could prevent the government from pursuing an aggressive reform agenda.

The Nifty and the Sensex plunged as much as 8.5% earlier, before recouping some losses to end at 21,884.5 points and 72,079.05 points, respectively.

The rout was widespread: 12 of the 13 major indexes ended the day lower, while the more domestically focussed small-cap and mid-cap indexes sank 8%.

"Markets were at an all-time high, a lot of hope was built up (on BJP's majority) and this will unwind over the next few sessions, said Mayuresh Joshi, Head-Equity Research India, William O'Neil and Company.

"The focus will turn to policy announcements as the reforms will anyway continue with BJP getting an absolute mandate."

Meanwhile, volatility surged to a 16-month high.

TV channels showed the ruling NDA was ahead in nearly 295 seats, while the Congress-led opposition coalition, called INDIA, was ahead in more than 230 seats. 272 seats is the minimum needed for a simple majority in the 543-member lower house of parliament.

Traders said selling by high-frequency traders accelerated the declines and triggered margin calls.

The market is witnessing a significant correction due to margin calls as retail investors were carrying heavily leveraged positions, said Rupak De, Senior Technical Analyst, LKP Securities.

The build-up in fresh short positions has also added to volatility, said Aniket Nerkar, founder of AlPhaStrat, a firm specialising in trading and investment strategies of derivatives.

Only the defensive fast moving consumer goods stocks gained on the day, rising 1.3%. Half of the eight stocks that advanced on the 50-member Nifty 50 were FMCG stocks.

On the flip side, state-run companies plunged 16.4% and energy stocks sank 12.5% to record their worst day ever.

Finance stocks retreated 7.9%, infrastructure sank 10.2% and realty plunged 9%, with the trio recording their worst sessions since March 2020.

Adani Enterprises and Adani Ports sank 19.3% and 21.2%, respectively, the most on the Nifty 50. Other Adani group stocks were down between 10%-19%.

Another reason for the fall was the high valuations, with a plethora of stocks near record highs.

"One of the arguments behind India's rich valuations could have been the political stability, policy certainty that a strong government gave. Some of those assumptions could come under question (with this election outcome)," UBS analysts said in a note.

(Reporting by Sethuraman NR in Bengaluru; additional reporting by Jayshree P. Upadhyay; Editing by Varun H K and Savio D'Souza)