Indian stocks recorded their strongest rally in more than three years on Monday after exit polls pointed to a win for the ruling Bharatiya Janata party-led coalition.
The BSE Sensex was up more than 3 per cent, with industrial and financial sector stocks notching the biggest gains, as markets bet that the election result would bring political continuity and business-friendly reforms.
The Indian rupee strengthened 1.1 per cent to Rs69.53 against the dollar, rebounding slightly from a period of weakness since April amid rising oil prices.
Exit polls released on Sunday night after the seventh and final phase of voting in the world’s largest democracy indicated that the incumbent BJP and its allies would secure a parliamentary majority.
Indian exit polls have a mixed record in predicting electoral results but the country’s informal betting market, another closely watched indicator, predicted a similar outcome on Friday.
“The outperformance of Indian markets and the currency since February . . . reflects increased investor confidence of the incumbent staying in power,” said Prakash Sakpal, economist at ING.
However, the polls were divided on whether the BJP would be able to secure a majority on its own, as it did in 2014, or whether it would have to rely on the support of smaller regional parties to form the next government.
Analysts say a coalition would likely act as a check on the impulsive instincts of Prime Minister Narendra Modi, who rattled businesses and consumers with an overnight demonetisation exercise in 2016.
The “presence of coalition partners will help to prevent the sort of disruptive and poorly considered policymaking that was seen on occasion during the BJP’s previous term”, according to the Economist Intelligence Unit.
The official results are expected from India’s Election Commission on Thursday.
The single biggest gain on Monday morning was an 8.3 per cent share price rise for Adani Ports, a key business in the corporate empire of Gautam Adani, a Gujarat-based businessman who developed a strong relationship with Mr Modi during the latter’s decade as the state’s chief minister.
Strong gains were seen also for financial stocks including Indiabulls Housing Finance, which gained 16 per cent. Indiabulls is one of the nonbank lenders worst affected by a recent squeeze in India’s short-term corporate debt market. Mr Modi’s government has exhorted the central bank to take stronger action to boost liquidity.
Industrial groups including UltraTech Cement and automotive groups Maruti Suzuki and Mahindra & Mahindra also rose by more than 4.5 per cent.
India’s stock market had already risen since late February, when a confrontation with Pakistan prompted an upsurge in nationalistic sentiment. This was seen as boosting Mr Modi’s chances of victory and reducing the likelihood of extended political uncertainty after the election.
Beyond a preference for continuity, investors have been encouraged by some of the reforms undertaken during Mr Modi’s tenure — notably the introduction of a new national tax system and a bankruptcy code seen as a big boost to corporate governance.
For many, this has outweighed negative factors such as the unpopular banknote demonetisation, concerns about the pace of job creation and the stressed balance sheets of state-owned banks.
“For all the criticism of the Modi government, a lot has been achieved, building a structure from which the economy can grow without triggering an inflationary spiral,” said David Cornell, chief investment officer at London-listed India Capital Growth Fund. “We want more of that in the future.”