Indian stocks rise, rupee strengthens on hopes of policy continuity

On a high.
On a high.
Image: REUTERS/Amit Dave
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This post has been updated

Indian equity markets are ecstatic that Narendra Modi may get a second term as prime minister.

For the first time in its history, India’s benchmark index, the BSE Sensex, today (May 23) crossed the 40,000 mark in less than two hours of market opening. The National Stock Exchange’s Nifty index also crossed the psychologically important 12,000 mark. Though, markets shed the gains accumulated in early trade and closed in the red.

In forex trade, the rupee was on a strong footing, appreciating against the dollar. In fact, some analysts believe that with Modi back in power, the currency could even appreciate to 67 per dollar.

The markets, which view policy stability as a major headwind for the economy, had posted their single-biggest gain in 10 years after exit polls predicted, on May 19, that the Bharatiya Janata Party (BJP)-led government will return to power.

“Early trends (on May 23) suggest a confirmation of the exit poll results, which has been taken positively by the market. Though the current index level already captures this outcome, any further trend in creating a more stable government will be considered positive by the market,” said Abhimanyu Sofat, head of research at IIFL Securities.

It is likely that in the coming days, markets will continue to outperform but a lot more is needed to sustain the momentum, believe analysts.

“Post initial euphoria, focus would shift to hardcore economic decisions and the manner in which slowdown and economy are handled in Modi 2.0. We are positive on long-term for the markets, our Nifty target in a bullish scenario is 13000, for which growth rates need to catch up,” said Amnish Aggarwal, head of research at Prabhudas Lilladher.

Before the elections India’s economic growth had slowed down, private investments have been subdued, jobs are scarce, and consumption has been hit. In 2018, the foreign investors had also withdrawn over Rs90,000 crore (around $13 billion) from the India market.

Therefore, the government needs to bring about significant changes in the economy to ensure the market and the economy continue to scale up and it can win back the overseas investors.