Sensex, forex hit by banknotes measures; bonds gain

MUMBAI (Reuters) - Indian stocks and the rupee fell on Wednesday as uncertainty sparked by the country's move to withdraw larger banknotes from circulation was compounded by bets that Republican candidate Donald Trump was likely to win the U.S. elections.

The broader NSE Nifty fell as much as 6.3 percent, dragging the rupee lower and prompting the central bank to intervene in currency markets in morning trading, a trader said.

However, bonds rallied - with the benchmark 10-year bond yield down 13 basis points at 6.67 percent.

The bond yields fell as prices rose on a safe-haven bid and on hopes Prime Minister Narendra Modi's withdrawal of higher value banknotes would ease inflation, raising the prospect of more rate cuts from the central bank.

Modi on Tuesday announced that 500 and 1,000 rupee banknotes would be withdrawn from circulation at midnight to crack down on rampant corruption and currency counterfeiting.

"The impacts could be different depending upon sectors - deflationary in some while contraction in others. This is a short-term risk for the economy," Samiran Chakraborty and Anurag Jha, economists at Citi wrote in a note.

The broader NSE share index was down 3.7 percent as of 0536 GMT, while the benchmark BSE Sensex was down 3.6 percent. Trading was highly volatile, with the Nifty volatility index surging 21 percent.

The partially convertible rupee was at 66.92 per dollar versus its previous close of 66.6150/6250.

Real estate shares were among the biggest decliners, reflecting a belief that large amounts of black money are steered towards property transactions. The Nifty Reality index was down 15.5 percent, with DLF Ltd , India's biggest property developer, down 20.86 percent.

Investors also flinched as Trump scored a series of shocking wins in battleground U.S. states, opening a path to the White House and rattling global markets that were counting on Democrat Hillary Clinton to win.

The Nifty IT index and the Nifty Pharma index, the two sectors with heavy exposure to the U.S. market, were both down around 4 percent each.

(Reporting by Swati Bhat; Editing by Eric Meijer)