Posted on Thursday, May 14, 2009 - 06:14 am:

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MUMBAI (Reuters) - Indian stocks fell sharply and the rupee weakened to 50 per dollar on Thursday on signs neither of the major coalitions had won a majority in national polls, but then pared losses on a view the current government could stay in office.

Bond yields rose through the day on fears of increased government spending after exit polls showed the ruling Congress-led UPA coalition had a slight lead over the opposition Hindu-nationalist NDA coalition, although both parties would need extra partners to from a government.

Official results are due on Saturday.

"If the exit polls are accurate, then the UPA would likely come to power after building a coalition with some regional parties, including the Left," Tushar Poddar at Goldman Sachs said in a report.

"The worst fears of the market would be alleviated, i.e., the likelihood of the Third Front playing a major role in the new government."

Though exit polls have been off the mark previously, most pointed to a fractured verdict which analysts said could be a roadblock for economic reforms in Asia's third-largest economy,

The benchmark stock market fell 2.7 percent in early deals, led down by energy giant Reliance Industries and financial stocks such as State Bank of India, HDFC Bank and ICICI Bank, before paring its fall.

"The positive outlier is if the final numbers are more decisive. The negative outlier would be if the left or Third Front have a chance at forming the government," said Rajeev Malik, chief economist at Macquarie in Singapore.

The National Stock Exchange's India Volatility Index is up 8.8 percent so far in May as investor worries about the lack of a decisive election outcome mounted.

"Investors are going to just wait it out. It doesn't pay to be a hero in this market," Malik said.

Still the main stock index is up almost 50 percent from its 2009 lows hit in early March, and foreign investors have bought more than $2.5 billion of stocks since the start of April.

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