The BSE Sensex fell as much as 535 points on Monday on fears that Aam Aadmi Party's victory in Delhi assembly elections would pave the way for populist policies in the national capital. Shares of power utilities such as Tata Power and Reliance Infra, which run distribution companies in Delhi, came under sharp selloff.

The Sensex and Nifty closed lower for the seventh straight session as exit polls showed a majority for the Aam Aadmi Party. Votes will be counted on Tuesday. (Read)

"Today's correction is a knee jerk reaction to the exit polls giving majority to Aam Aadmi Party in Delhi," said Alex Mathew, head of research at Geojit BNP Paribas Financial Services.

AAP's earlier policies have been anti-corporate and a win in Delhi could give a boost to other socialist parties, analysts told NDTV. (Read)

AAP's policies such as more subsidy on power and water and its opposition to some reforms such as foreign direct investment in retail, have struck a sour note with investors, analysts say. As Delhi's Chief Minister for 49 days, Mr Kejriwal had ordered the state auditor to look into the accounts of power distribution companies to see if they were profiteering; he had also threatened to cancel the licences of Delhi's two electricity distributors over power supply issues.

"They will cut power tariffs, water tariffs - that is the expectation," said TS Harihar of HRBV Client Solutions. Markets could correct more in the short term, but 8,500 should act as a floor for the Nifty, he added.

Power stocks led the decline, with Tata Power losing 2.7 per cent on fears that AAP may again lower power tariffs in Delhi like it did in its earlier stint. Reliance Infrastructure fell 8.7 per cent.

Weak corporate earnings also weighed on sentiments. "It is a large reaction to disappointing results... There is no demand in the economy, which is my major cause of worry," said Nischal Maheshwari, head of research at Edelweiss Financial Services.

The biggest Nifty losers were L&T, down 6.6 per cent, Tata Steel, down 5.75 per cent and Gail India, down 4.62 per cent. All three reported a sharp fall in profit during the December quarter.

However, IT stocks such as HCL Tech, Infosys and Wipro gained tracking the weakness in the rupee, which slipped below 62 per dollar.

The Sensex ended 490 points lower at 28,227 while Nifty closed at 8,526, down 135 points.

(With inputs from Reuters)