Five exit polls released after voting ended at 6:00pm (local time) indicated that the capital's former chief minister Kejriwal had comfortably beaten Modi's Hindu nationalist Bharatiya Janata Party (BJP), with four of them forecasting an overall majority.
While polls have been wide of the mark in the past, victory would be particularly sweet for the anti-corruption champion, trounced by Modi when they both battled for the seat of Varanasi in May's general election.
Local TV showed scores of AAP workers celebrating and distributing sweets at the party office as Kejriwal thanked the voters in a series of tweets hours after exit polls projected him as the new chief minister.
"My gratitude to people of Delhi for their support. You are so amazing. You rejected politics of caste and religion. Hope final results are as per exit polls," Kejriwal tweeted.
My sincere thnks n congratulations to all selfless volunteers of AAP, who worked round the clock for their country. AAP is bcoz of u (1/2)
— Arvind Kejriwal (@ArvindKejriwal) February 7, 2015
My gratitud 2 Delhiites for their support. U r so amazing.U rejcted politics of caste n religion.Hope final results r as per exit polls(2/2)
— Arvind Kejriwal (@ArvindKejriwal) February 7, 2015
Most pundits had written off Kejriwal after he resigned following a chaotic 49-day spell in charge of the Delhi state government last year and then saw his party win just four seats in the general election.
But after apologising for leaving voters without an elected government for a year, Kejriwal has been the star of the campaign, outshining former policewoman Kiran Bedi who was the BJP's pick for chief minister.
A steady stream of voters could be seen outside polling booths throughout the day and the electoral commission put the provisional figure for final turnout at an impressive 67 percent, a new record.
"People want a corruption free and bribery free Delhi and I'm hopeful they will vote accordingly," Kejriwal told reporters as he went to vote.
"I am confident the people will win and that the truth will win."
Rattled by Kejriwal's popularity, Modi headlined several major rallies, portraying his rival as a "backstabber" who betrayed voters last time round by quitting so early.
Having invested an unusually large amount of political capital in a state election, observers say a defeat will be a significant setback for a prime minister who has enjoyed an extended honeymoon with voters since his landslide general election victory.
"It (Aam Aadmi) appears to be a credible challenger to the Modi juggernaut," said an editorial in The Hindu newspaper Saturday.
Bedi, who had been hoping Modi's strong support would be decisive, refused to throw in the towel after the exit polls were released.
"We must wait until February 10 for the results. I can assure you truth will win and the exit poll results will change," she told reporters.
A former reality TV show host, Bedi is a seasoned media performer. But Kejriwal has proved his pulling power among working class and minority voters, with impromptu appearances drawing thousands.
Kejriwal's campaign has been based around promises of lower utility bills and free wifi for Delhi's 17 million residents, as well as pledges to counter corruption.
"Prices have gone up, water and electricity are becoming costlier. We need a government that brings some relief to the poor people," said 24-year-old Pranav Singh as he voted in the Saket district.
Kejriwal famously declared himself an anarchist during his brief tenure last year and staged several protests outside government offices.
After winning plaudits for taking the metro to his inauguration, his administration soon lost its sheen, with a raid on a largely African neighbourhood sparking claims of racism.
In a press conference Friday, Modi's finance minister and top lieutenant Arun Jaitley said Aam Aadmi's rule had been "nightmarish".
"Delhi needs an administrator and not an anarchist," he said.
The BJP won most seats in the last election in December 2013, but fell short of a majority in the 70-seat assembly, enabling Kejriwal to form a government with the help of the centre-left Congress party.
It was the last real setback for the BJP, which has since stormed to victory in a string of state polls as well as the general election.
Defeat would also present Modi's government with a headache as Aam Aadmi is likely to try and stop it pushing through reforms on issues such as land acquisition and foreign direct investment in the capital.
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