Stock Market Cheer Potential Third Term for PM Modi; Eyeing Reform Push

Share market rally: Should the exit polls prove accurate, investors are expected to focus on policy continuity and economic reforms

Share market rally: The benchmark indices, which are up 4 per cent this year, experienced volatility around two-year highs in May as shadow betting markets suggested a closer election than earlier opinion polls had indicated.

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Share market rally: Prime Minister Narendra Modi's alliance, NDA, is anticipated to expand its majority in parliament following the world's largest election, a development likely to boost the country's financial markets due to expectations of economic reforms, according to Reuters. Exit polls released on Saturday after six weeks of voting project that the BJP will increase its 303 seats in the 543-member lower house.

The official results, to be announced on Tuesday (June 4), come after a general election involving a billion eligible voters. Despite the exit polls' mixed track record, the projections suggest a favourable outcome for investors, who might remain cautious when markets open on Monday.

Should the exit polls prove accurate, investors are expected to focus on policy continuity and economic reforms. Modi's campaign prominently featured religion and caste politics, but the anticipated stability could be a boon for financial markets.

"Exit polls hint at political stability and a strong mandate, a major boost for Indian equity markets," said Trideep Bhattacharya, Chief Investment Officer for equities at Mumbai-based Edelweiss Mutual Fund. "Investors should brace for sustained economic growth, a robust capex cycle, and reforms over the next five years."

India's S&P BSE Sensex and NSE Nifty 50 indices could see gains of 1 to 2 per cent on Monday, according to Aishvarya Dadheech, Chief Investment Officer at Fident Asset Management, who noted that the election results had already been factored into the market.

Large-cap stocks with significant foreign ownership, such as HDFC Bank, Bajaj Finance, Infosys, and TCS, are expected to benefit, said Neeraj Dewan, Director at brokerage Quantum Securities. Longer-term gains might be seen in capital goods, infrastructure, and commodity firms, as predicted by Vikaas Sachdeva, Managing Director of investment firm Sundaram Alternates.

The benchmark indices, which are up 4 per cent this year, experienced volatility around two-year highs in May as shadow betting markets suggested a closer election than earlier opinion polls had indicated. Foreign investors sold a net $3 billion in May, increasing hedging ahead of the election results.

These investors could return significantly after staying on the sidelines, Dewan of Quantum Securities suggested. Such inflows would put upward pressure on the rupee, which the central bank has been trying to curb through market intervention, and boost bond prices, noted Madhavi Arora, economist at Emkay, a Mumbai-based brokerage.

A strong victory for Modi, as suggested by the exit polls, could provide the political capital needed to implement tougher reforms to maintain robust economic growth in the world's most populous nation.

India's economy grew by 8.2 per cent in the financial year ending March 2024, up from 7 per cent the previous year, driven by government infrastructure spending and a real estate boom. However, private firms have yet to increase spending on new capacities, and rural consumption remains weak.

An expectation of policy continuity might lead to increased private investment, said Sachdeva of Sundaram Alternates. "Post-election results, we will see more news from the private sector, leading to a further market rally," he stated.

Tougher reforms, such as changes to land and labour laws, will depend on the number of seats Modi's BJP wins, UBS Securities noted in a May 24 report. The BJP's manifesto promises job creation, infrastructure and manufacturing boosts, and expanded welfare programs, but avoids land and labour law changes that require state government support.

Economists also predict that a Modi-led government will continue reducing India's fiscal deficit, thereby strengthening its economic fundamentals.

Ahead of Tuesday's results, India's exchanges have asked brokers to tighten risk management. Nuvama, a major brokerage, has requested clients maintain higher margins against positions in the derivatives market, according to a communication reviewed by Reuters.