Indian stocks volatility index shows election fears

Neither of the parties is expected to win an outright majority, and the focus will be on possible coalition partners.

A tight race across India has sparked fears of a weak coalition government that could delay pro-market reforms as the country grapples with the global economic crisis and security issues.

Political instability worries following elections have hurt the stock market in the past, with the main BSE index .BSESN plunging as much as 16.6 percent on May 17, 2004, when the ruling BJP-led group suffered a shock defeat and the Congress party forged an alliance with the communists.

In 1999, after rising rapidly in the months ahead of the general election, the market then eked out gains of just 0.1 percent in the following month.

"It appears that a government which is perceived to be stable has a positive impact on activity," Goldman Sachs analyst Tushar Poddar said in a recent note.

"The two elections in which activity declined were when neither of the two major national parties -- the BJP or Congress -- were a part of the ruling coalition," he said.