MUMBAI - Indian markets plunged early on Tuesday before recovering some ground as Reserve Bank of India Governor Urjit Patel's unexpected resignation on Monday shocked investors.
For further direction traders were cautiously awaiting results from crucial state elections due later on Tuesday.
Patel's resignation came after a month-long tussle over policy with the government that has raised concerns about the central bank's independence as a national election nears.
Government officials had been pressuring the RBI to allow some public sector banks laden with bad debt to lend more easily, and pushed for the central bank to hand over some of its surplus reserves to help fund the fiscal deficit.
"Though both parties have valid arguments on their points of view, the sudden resignation raises questions on whether the Indian government is trying to restrain public institutions and undermine RBI’s independence," said Anuja Munde, portfolio manager at Nikko Asset Management in Singapore.
"This resignation, along with political uncertainty, will keep the market volatility elevated in the run-up to the 2019 general elections."
The rupee dropped 1.5 percent to a one-month low of 72.4650 per dollar in early trade, but pared some losses to trade at 72.24 by 0453 GMT versus its previous close of 71.35.
Traders also cited some dollar-selling intervention by state-run banks on behalf of the RBI, which helped stabilise the rupee.
The benchmark 10-year bond yield was at 7.65 percent versus 7.59 percent at the previous close after initially rising as high as 7.71 percent.
The broader Nifty was down 1 percent.
"I don't see the market going lower from here as people have already reacted to a possible unfavourable outcome for the BJP (Bharatiya Janata Party)," said Sudhakar Pattabiraman, head of research operations, William O'Neil India.
"If there is a recovery in terms of BJP gaining some seats, then we might see markets recover a little."
Ruling BJP was trailing on Tuesday in three big heartland states, two TV networks said, as counting began from local elections seen as a final trial of strength for Prime Minister Narendra Modi before general elections next year.