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MUMBAI (Reuters) - The BSE Sensex fell the most this month on Tuesday after the DMK's withdrawal from the ruling UPA coalition raised doubts about the fate of the government's reforms and the RBI stuck to a cautious stance on monetary policy.
The regional Dravida Munnetra Kazhagam (DMK) party pulled out of the ruling coalition on Tuesday, jeopardising Prime Minister Manmohan Singh's economic reforms but posing no immediate threat to the minority government, which can survive with the support of other parties. (Read full story here)
The political uncertainty came the day Reserve Bank of India cut interest rates by 25 basis points but stuck to a cautious tone on future rate cuts, disappointing investors. (Read full story here)
The RBI also left the cash reserve ratio, a key liquidity tool, unchanged, sending banking shares such as ICICI Bank Ltd (ICBK.NS) lower.
"The market does not like uncertainty and DMK provided that, which led to some correction," said IDBI Life Insurance CIO Aneesh Srivastava, who manages 30 billion rupees in capital markets.
"The only statement in the monetary policy which is disturbing is that further rate cuts are limited," Srivastava added.
The Sensex fell 1.48 percent, or 285.10 points, to 19,008.10, its lowest close since March 4 and biggest fall since Feb 28.
The Nifty fell 1.53 percent, or 89.30 points, to 5,745.95.
The uncertainty over the political and economic outlook comes as a radical bailout for Cyprus is roiling global markets, raising concerns about foreign investor inflows.
Foreign investors bought a net of around $24.37 billion in stocks last year, and about $9.8 billion so far this year, which makes them critical to stock markets.
Banking stocks were among the leading decliners, after the RBI left CRR unchanged, disappointing some investors, and raised doubts about future rate cuts.
ICICI Bank fell 1.8 percent and State Bank of India 2 percent.
Mahindra & Mahindra Ltd (MAHM.NS) dropped 3.85 percent. The company said after market hours that its Jaipur tractor plant would stop production for five days to align output with sales requirements.
Bharti Airtel Ltd (BRTI.NS) shares ended 4.6 percent lower after chairman Sunil Mittal was ordered on Tuesday to appear before a court on April 11 in a case over alleged corruption in allocating mobile phone bandwidth a decade ago. (Read full story here)
Shares in Sun TV Network Ltd (SUTV.NS) ended 5.74 percent lower after Citigroup downgraded the stock to "neutral" from "buy", citing its stronger performance compared with peers recently.
The shares extended losses after the DMK announcement, given that Sun TV Chairman Kalanithi Maran's brother is a lawmaker from the DMK party and a former minister.
Additional Reporting by Abhishek Vishnoi; Editing by Anupama Dwivedi