Indian markets fall as exit polls show Modi struggling

By Suvashree Choudhury

MUMBAI (Reuters) - Indian markets weakened as exit polls in state elections augured badly for Prime Minister Narendra Modi's ruling party just months before a national vote.

The bearishness was reinforced by higher oil prices following an agreement by global producers to cut output, which will drive up India's import bill.

The rupee eased to 71.45 per dollar, its weakest since Nov. 20. It recovered marginally to 71.30, but was still weaker than Friday's close of 70.80.

The 10-year benchmark bond yield rose to 7.52 percent from 7.46 percent on Friday while the broader NSE stock index was 1.7 percent lower.

"The exit poll results are definitely slightly more towards the negative side than what the markets were expecting," said Neeraj Dewan, director, Quantum Securities.

Investors are scrutinising polls in five states - Rajasthan, Chhatisgarh, Madhya Pradesh, Telengana, Mizoram - for clues to how Modi's Bharatiya Janata Party will fare in a general election that must be called by May.

If Modi were to win a second term at the coming general election without having to resort to forming a potentially unstable coalition, it would reassure investors wanting to see a continuation of financial reforms.

The ballot counts for the state contests are expected to end on Tuesday, though exit polls, which have often proved unreliable in India, showed the BJP heading for defeat in one heartland state, Rajasthan, while Chhatisgarh and Madhya Pradesh were too close to call.

"The exit polls are mixed, but we don't want to take any risk before actual results are out given that oil is also up," said a trader at a foreign bank. "Sentiment will remain cautious until state election results are out."

OIL BILL RISING

Oil prices extended gains on Monday after OPEC and its Russia-led allies agreed to slash production by a combined 1.2 million barrels per day next year.

A sharp fall in oil since October had brought some relief to Indian markets during the past few weeks, and the sight of prices rising again was unsettling.

India imports more than two-third of its oil requirement and higher crude prices adversely affects its current account deficit and inflation, and consequently the rupee exchange rate.

Meanwhile, in the local stock markets, financials accounted for the biggest share of losses on the NSE index by late morning, with HDFC Bank Ltd falling as much as 2 percent in its sharpest intraday drop in six weeks.Oil-to-retail conglomerate Reliance Industries Ltd, down as much as 4.5 percent at its lowest since Nov. 13, was the biggest drag on the index.

(Additional reporting by Chris Thomas in Bengaluru; Editing by Simon Cameron-Moore)