By Surojit Gupta
NEW DELHI (Reuters) - India could be heading for a weak coalition government on Thursday, with exit polls from the general election suggesting the ruling Congress-led coalition and its rivals would fall short of an outright majority.
Three exit polls on Wednesday showed the ruling Congress-led coalition slightly ahead of the opposition Hindu-nationalist alliance, but both groups needed smaller allies to gain a parliamentary majority.
Such a scenario may leave little room for either group to manoeuvre on the economy, because a shaky coalition is seen as unlikely to push key reforms such as privatisation and raising the foreign investment limit in the insurance sector.
Exit polls though have a mixed history in India. Official results will be released on Saturday.
"If the Congress's lead was larger, the market may have taken it as a good sign," said Gajendra Nagpal, chief executive of Unicon Financial Intermediaries.
"But now that it is just a slender lead, the market may become uncomfortable and think there might be more of a mess in the offing."
At 5:25 a.m. British time on Thursday, India's main stock index was down 2.7 percent.
The Indian rupee was trading at 49.97 to the dollar, at 5:30 a.m. British time, off from a two-week low of 50.02 hit in early deals, and lower than Wednesday's close of 49.71.
After the last election in 2004, Indian markets tumbled on fears an unstable coalition would soft-pedal on the next stage of reforms in Asia's third-largest economy which striving to emerge as a major global player.
DEAL MAKING
The vote count is scheduled for Saturday, when results from all races for the 543-member lower house of parliament should be known.
The possibility of a weak coalition emerging from the election could unsettle markets.
"These exit polls will not assure the market, which is factoring in a lead for the BJP-led alliance," said VK Sharma, head of research at Anagram Stock Broking.
"There will be some downside and it will be volatile."
Anantha Nageswaran, chief investment officer - Asia Pacific, Julius Baer in Singapore, said: "There are negative cues globally and we've had a bit of a rally in stocks, so this will be seen as an excuse to take profits."
"Investors will think it best to wait for the final numbers."
To rule a party or a coalition requires the support of 272 lawmakers, forcing the Congress and Hindu-nationalist BJP to launch a hunt for new allies.
The election, projections showed, may have bruised the Communists, leaving them with about 37 seats, down from more than 60 they won in 2004. That would weaken their ability to hold the balance of power in any new government.
"As long as it is clear the Congress or the BJP will form a stable government with less of an influence from the left, the markets will move up," said Samir Arora, fund manager at Helios Capital management in Singapore.
"People waiting on the sidelines will start investing."
Though the exit polls put Congress ahead, the BJP is seen as having gained ground.
"The deal-making will start in earnest now," said Alastair Newton, senior political analyst at Nomura International in London. "Come Saturday night, and we will still be a long way from knowing the final outcome."
(Additional reporting by Rina Chandran; Editing by Krittivas Mukherjee and Jerry Norton)
