The sell-off came after polls predicting a large majority for the National Democratic Alliance pushed stock prices to an all-time high.

Indian financial markets experienced a sharp sell-off, Trends in early vote counting suggested that the Bharatiya Janata Party (BJP) alliance led by Prime Minister Narendra Modi was unlikely to win an overwhelming majority as weekend exit polls predicted.

“The numbers for NDA are muted and below expectations. So we are seeing profit-taking as investors are nervous. We have to wait another hour to get more clarity,” said Kranthi Bathini, director of equity strategy at Mumbai-based WealthMills Securities.

“But we can expect profit-taking to continue and expand if these trends continue,” he said.

Polls over the weekend predicted a clear victory for Modi's National Democratic Alliance (NDA), sending markets to all-time highs on Monday as investors were buoyed by expectations of continued economic growth.

Traders said there was a sell-off in the markets on Tuesday as investors awaited more clarity on the total number of seats the NDA would win.

The Nifty index fell as much as 3.76 percent to 22,389.85 points, while the BSE index fell to an intraday low of 73,659.29 points, down 3.67 percent. Both indices had hit all-time highs on Monday.

At 04:25 GMT, both markets had recovered slightly and were each down about 2 percent.

By the close of trading on Monday, the value of the benchmark indices had risen by just over three times since Modi took office as prime minister in May 2014.

The rupee fell to as much as 83.4375 against the dollar from the previous close of 83.1425. The yield on the benchmark 10-year bond rose 8 basis points to 7.02 percent in early trade.

“The initial results are obviously not positive for the markets. But as long as BJP/NDA win the 272 seats required to form the government, the overall decline will only be a short-term reaction,” said Gaurav Dua, senior vice president and head of capital markets strategy at Sharekhan.

Monday's rally in markets was fueled by optimism about the economic outlook under the new Modi government.

“Markets have rallied ahead of expected election results and it is very hard not to be optimistic about India,” said Vivek Bhutoria, emerging market equity portfolio manager at Federated Hermes.

“Measures are being taken to attract investment and the rebalancing of the global supply chain will benefit India over time. We are already seeing initial benefits in exports of electronics and chemicals.”

Foreigners, who invested a net $20.7 billion in Indian equities last year but pulled out before the election, are widely expected to become buyers.

They bought shares worth a net 68.51 billion rupees ($824.4 million) on Monday, while domestic institutional investors bought shares worth 19.14 billion rupees, according to preliminary exchange data.

Investors expect the Modi government to continue to focus on making the country a manufacturing hub – a project that has prompted foreign companies such as Apple and Tesla to locate their production beyond China as they diversify.

“India is all about infrastructure,” says Steve Lawrence, chief investment manager at Balfour Capital, which manages 350 million euros (382 million dollars) in various funds.

“It's about investing in infrastructure, roads and electricity. With the technology they have, you could see tremendous growth.”