Indian stocks volatility index shows election fears

Apart from political risk, other factors seem to bode well for the stock market. Economic growth is widely expected to pick up later this year, while some valuations are still cheap and foreign funds appear eager to invest.

Foreign funds moved $1.5 billion into Indian stocks in April and $655 million in the first four days this week, but that could quickly reverse in the face of political instability, analysts said.

"If we have a weak coalition, there are going to be questions about how long the government will last and if there is going to be a lot of fighting between the various factions," said Sanjeev Prasad, co-head of institutional equities at Kotak Securities.

"But the government needs to be concentrating on improving India's fiscal situation for the market to recover."