New Delhi

Nifty 50 and Sensex plunge

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Indian stocks fell the most in nearly four years on Tuesday, as preliminary election results showed Prime Minister Narendra Modi's alliance falling short of an expected landslide victory. The NSE Nifty 50 index closed 5.45% at 21,995 points, while the S&P BSE Sensex was down 5.10% to 72,562 points. Both indices had dropped as much as 8.5% earlier in the day after setting new highs on Monday.

Market volatility surges

The volatility index rose to 31.71, the highest level since February 2022, indicating increased market jitters. "Markets were at an all-time high, a lot of hope was built up on the BJP's majority, and this will unwind over the next few sessions," said Mayuresh Joshi, head of equity research India at William O'Neil and Company. He stated that while reforms will most certainly continue with the BJP gaining an absolute majority, the attention would move to upcoming policy announcements.

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Election results impact market sentiment

According to TV broadcasters, the ruling National Democratic Alliance (NDA) has approximately 293 MPs, while the opposition coalition led by Congress has more than 220 seats. To form a simple majority in the 543-member lower house of parliament, the NDA requires 272 seats. Analysts warned that the BJP obtaining fewer seats than projected could limit the government's capacity to enact ambitious reforms, influencing market sentiment.

High-frequency traders and margin calls exacerbate the decline

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Traders pointed out that high-frequency traders' selling exacerbated the market's decline, resulting in margin calls. "The market is experiencing a significant correction due to margin calls, as retail investors held heavily leveraged positions," said Rupak De, Senior Technical Analyst at LKP Securities. Aniket Nerkar, Alphastrat's creator, observed that the accumulation of new short positions added to market volatility.

Outlook for Indian markets

Looking ahead, market participants will keep a careful eye on policy changes and the ultimate election outcomes. Analysts believe that the fundamental outlook for Indian stocks remains strong, subject to the continuance of reform actions by the BJP-led government. However, in the medium term, investors should expect considerable volatility as the market digests the election results and their implications for future economic policy.

(With inputs from agencies)