Indian Prime Minister Narendra Modi was set to meet his allies on Wednesday to discuss forming the government, a day after his Hindu nationalist party lost its outright majority in parliament in a surprise election verdict.

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News Analysis: ‘A victory that feels like defeat’

Modi's Bharatiya Janata Party (BJP) won 240 seats on its own in the general election, 32 short of the halfway mark in the 543-member decision-making lower house, according to official results announced late on Tuesday.

The outcome unnerved investors, with stocks falling steeply on Tuesday, since Modi would have to depend on disparate regional parties whose political loyalties have wavered over the years.

The National Democratic Alliance (NDA) led by the BJP won 293 seats, more than 20 ahead of the 272 needed to form a government.

Newspaper said Modi's halo had dimmed, with the Indian Express's banner headline reading "India gives NDA a third term, Modi a message."

Modi's own victory in his seat of Varanasi, considered one of the holiest cities for Hindus, was subdued, with his margin of victory down from nearly 500,000 votes at the last general election in 2019 to a little over 150,000.

But this reduced victory may not necessarily mean reform paralysis, the chairman of a government finance panel, Arvind Panagariya, said in an editorial in the Economic Times newspaper.

"Despite the reduced majority in parliament, the necessary reforms are entirely feasible. Delivering sustained growth at a accelerated pace can only strengthen the government's hand in the coming years," he said.

The opposition INDIA alliance led by Rahul Gandhi's centrist Congress party won 230 seats, more than forecast. Congress alone won 99, almost double the 52 it won in 2019 - a surprise jump that is expected to boost Gandhi's standing.

The INDIA alliance was also expected to meet on Wednesday in New Delhi, and discuss a future course of action.

But any efforts at government formation by the opposition were likely stymied by two of the BJP's key allies endorsing Modi and saying their pre-poll alliance with the party was intact.

Addressing a crowd of cheering party workers at the party headquarters late on Tuesday evening, Modi promised to work harder in his third term.

"The blessings of the people for the third time after 10 years boosts our morale, gives new strength," he said.