India markets to cheer likely third term for Modi, hope for reforms

Expectations that Indian Prime Minister Narendra Modi will expand his alliance's majority in parliament after the world's biggest election are likely to boost the country's financial markets on hopes of economic reforms.

Exit polls released on Saturday after six weeks of voting projected Modi's alliance will increase its 303 seats in the 543-member lower house and likely get the two-thirds majority needed to initiate amendments to the constitution.

The results of the general election among a billion eligible voters are to be announced on Tuesday. India's exit polls have a patchy record, often getting the outcome wrong, so investors may remain cautious when markets open on Monday.

If the projections are accurate, investors will likely focus on expected policy continuity and a push for economic reforms after a campaign in which the Hindu-nationalist prime minister emphasised religion and caste politics.

"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 next five years," Bhattacharya said.

India's S&P BSE Sensex and NSE Nifty 50 indices could gain between 1% and 2% on Monday, said Aishvarya Dadheech, chief investment officer at Fident Asset Management, who said the election results had been "discounted" in the market.

Notable gainers may be large-cap stocks with significant foreign ownership, such as HDFC Bank, Bajaj Finance, IT giant Infosys and tech services firm TCS, said Neeraj Dewan, director at brokerage Quantum Securities.

Longer-term, stocks related to the investment cycle such as capital goods, infrastructure and commodity firms could benefit, said Vikaas Sachdeva, managing director of investment firm Sundaram Alternates.

The benchmark indices, up 4% this year, experienced volatility around two-years highs in May as shadow betting markets suggested the election would be closer than opinion polls had suggested before the seven-stage vote began.

Foreign investors sold a net $3 billion in May and stepped up hedging ahead of the election verdict.

These investors could return "in a big way" after staying on the sidelines, said Dewan of Quantum Securities.

Such inflows will put upward pressure on the rupee, which the central bank has been attempting to curb through market intervention, and will boost bond prices, said Madhavi Arora, economist at Emkay, a Mumbai-based brokerage.

If Modi wins the strong victory suggested by the exit polls, he could gain political capital to push through tougher reforms needed to keep the economy of the world's most-populous nation growing robustly.

CHANCE TO BOLSTER STRONG GROWTH
India's economy accelerated to 8.2% growth in the financial year to March 2024 from 7% the previous year, led by government spending on infrastructure and a boom in real estate, data showed on Friday.

But private firms have not stepped up spending on setting up fresh capacities and consumption in rural areas has been weak.

An expectation of continuity in economic policies could lead to a pick-up in private investment, said Sachdeva of Sundaram Alternates.

"Post election results we will see lot more news coming in from the private sector, which will lead to a further rally in the markets," he said.

Tougher reforms such as changes to land and labour laws would depend on the number of seats Modi's Bharatiya Janata Party (BJP) wins, UBS Securities said in a note on May 24.

In its manifesto, the BJP promised to create jobs, boost infrastructure and manufacturing and expand welfare programs but avoided promising changes to land and labour rules, which need the support of state governments.

Economists also expect a Modi-led government will continue to bring down India's fiscal deficit, strengthening its economic fundamentals.

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