The BSE Sensex and Nifty surged to record highs while the rupee strengthened to an 11-month peak against the dollar on Friday as the opposition Bharatiya Janata Party led by Narendra Modi swept to a resounding majority in the world’s largest election.
Domestic-focused shares such as ICICI Bank Ltd and Ambuja Cements Ltd soared, reflecting hopes the BJP and its National Democratic Alliance are best placed to revive an economy growing at its slowest in a decade, while exporters like Infosys Ltd suffered from a stronger rupee.
The wider-than-expected BJP win spurred several investment banks, including UBS and Deutsche Bank, to raise their targets for domestic shares, as they noted indexes are still relatively inexpensive and thus have more room to gain. Still, most market gains were later capped and analysts cautioned the rally will now need to be justified, as key tests loom for the government, including the selection of a cabinet.
Other critical areas for investors include the new government’s relationship with a central bank focused on inflation and the need to deliver a budget that can reassure markets and credit agencies about the fiscal deficit.
“Clearly financial markets have gone far ahead of fundamentals,” said Ananth G. Narayan, co-head of wholesale banking for South Asia at Standard Chartered in Mumbai.
“The next 100 days will be critical for the next government to revive the investment climate.”
The strong market gains come less than a year after India was gripped by its worst currency crisis since the balance of payment crisis in 1991.
Although investors also credit measures taken by the outgoing Congress party and the Reserve Bank of India for stabilising markets, gains have accelerated since the BJP named Modi as its candidate for prime minister in mid-September, with the Sensex up 22 per cent since then.
As a result, India has gone from one of the most vulnerable emerging countries to one of the favourites among foreign investors; overseas funds have poured more than $16 billion into Indian stocks and bonds in the past six months.
The Sensex gained as much as much as 6.1 per cent to a record high at 25,375,63 before ending the session up 0.9 per cent – a gain that makes it the third-best performer in Asia in dollar terms so far this year after Indonesia and Pakistan. The rupee strengthened to as much as 58.62 per dollar, its highest since late June 2013, marking a 17.5 per cent gain since the record low hit in August.
The benchmark 10-year bond yield fell as much as 10 basis points to 8.68 per cent, its lowest since Feb. 6.