Indian shares surge on exit polls predicting Modi's third term

The market reacts to exit polls

Indian stocks rose to new highs on Monday as exit polls suggested Prime Minister Narendra Modi will be elected for a third term, potentially with a large mandate. Investors believe that continued public spending will help to preserve economic momentum.

The broader Nifty index rose as much as 3.59 per cent to a record 23,338.70 points, while the BSE index vaulted 3.76 per cent to a career-high of 76,738.89 points. The Nifty 50 index achieved its highest intra-day rise since February 2021. Bond yields also declined, with the benchmark 10-year government bond yield reaching 6.9421 per cent, its lowest level since April 2022, while the rupee rose to 82.9575, its best level since March.

Exit polls predict a strong mandate

Weekend exit polls indicated that Modi's Bharatiya Janata Party (BJP) and allies could boost their 303 seats in the 543-member lower house, potentially securing a two-thirds majority. This conclusion would outperform experts' estimates and likely assist equities markets, which have already reached record highs due to economic expansion.

"The markets are pricing in the continuation of this government's policies and approach to economic management," said Rajesh Bhatia, Chief Investment Officer of ITI Mutual Fund. He expects the government to continue focusing on significant capital expenditures and production-linked incentives to sustain growth.

Economic growth and investor sentiment

India's economic growth rose to 8.2 per cent in the fiscal year ending March 2024, driven by government infrastructure investment and a real estate boom. Analysts believe that a big Modi victory will provide the political capital required for other changes, like land and labour reforms.

Citi analysts said that a verified Modi victory would be viewed as a vote for continuity, which would benefit stocks in infrastructure, logistics, and manufacturing. Companies including Adani Ports, Larsen & Toubro, and Bharat Electronics are expected to benefit.

Investors also expect further efforts to build India as a manufacturing powerhouse, drawing global companies such as Apple and Tesla to diversify their production beyond China.

Foreign investment outlook

Foreign investors, who invested a net $20.7 billion in Indian shares last year but withdrew assets ahead of the election, may return after the vote. Goldman Sachs analysts discovered that clients believe political continuity will contribute to a stable macroeconomic environment and continuous changes.

Exit polls in India have historically been inaccurate, but official election results, which will be published on Tuesday, will validate the verdict. If the BJP wins easily, Swastika Investments Managing Director Sunil Nyati predicts a sustained market surge, particularly in large-cap companies, as foreign investors resume buying Indian equities.

(With inputs from Reuters)