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India shares fall to three-week low after Modi's BJP suffers debacle in Karnataka

Party's failure to form state government adds to investor concerns

MUMBAI (NewsRise) -- Indian shares fell to more-than-three-week lows on Monday after Prime Minister Narendra Modi's Bharatiya Janata Party failed to form a government in southern Karnataka state.

The BSE Sensex dropped 0.7% to 34,616.13, the lowest since April 25, and the Nifty 50 Index fell 0.8% to 10,516.70, adding to their about 2% losses in the previous week. Dr. Reddy's Laboratories slipped 4.2% and Cipla shed 2.7%, while State Bank of India advanced 2.5% before they report earnings on Tuesday. Bajaj Finance declined 1.8% following a 15% earnings-related rally last week. Among heavyweights, Housing Development Finance Corp. dropped 2% and its banking unit HDFC Bank slipped 1%.

On Saturday, the BJP pulled out of a test, directed by the country's top court, to rule Karnataka. B.S. Yeddyurappa, the state leader of the party who was appointed the chief minister on Thursday, said he preferred to resign rather than take the court-mandated test to prove that he had support of majority of lawmakers.

The failure of the BJP to form the state government likely raises the political risk premium in the lead up to next year's national elections. Yeddyurappa's resignation makes way for the Indian National Congress, which tied up with a local party, to achieve the majority required to take reigns in the state.

Maybank Investment Bank said in a note that the hung verdict in Karnataka and coming together of the opposition parties would pose a threat to BJP in national elections next year.

The political uncertainty prompted investors to shrug off the overwhelmingly positive cues of U.S. over the weekend. Futures on the S&P 500 Index advanced and regional indexes gained Monday after the U.S. and China issued a joint statement on Saturday that they would work toward "substantially" reducing the U.S. trade deficit with China. The U.S. administration suspended plans to impose tariffs on imports from China amid progress in the trade negotiations and U.S. Treasury Secretary Steven Mnuchin said a trade war with China was "on hold".

Among other movers on the BSE on Monday, Ashok Leyland dropped 9.5%. While the commercial vehicle maker's March quarter net profit exceeded estimates of analysts polled by Reuters, analysts were disappointed about the company's profit margins.

Strides Shasun tumbled 11.9% on higher-than-usual volumes, adding to Friday's losses after its March quarter earnings missed estimates. About 17 million shares changes hands on the NSE, more than 18 times the 30-day average.

--Nimesh Vora

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