Stock markets surged early this week in response to exit polls reflecting on a decisive win for Modi and the BJP, and rallied again early Thursday with the Sensex crossing the 40,000 level for the first time. The Nifty too crossed the key 12,000 market to set a new record high. Enthusiasm for Prime Minister Modi’s re-election – seen as representing continued stability and strong leadership needed to drive forward economic reforms – also fueled gains in the benchmark stock indices and drove bond prices to a 13-month high.
Despite a vote count suggesting a sweeping mandate for PM Modi, the markets cooled significantly Thursday afternoon as stock market players sought to capitalize on the speculative gains made earlier in the day. Escalating concern surrounding rising U.S.-China tensions also contributed to the market drop.
With the Indian National Stock Exchange now closed for the day, markets may react to post-election commentary on Friday, but are likely to stabilize relatively quickly. In the short term, we anticipate a moderate positive influence on the stock market from the prospect of a stable and pro-business government for the next five years. Post-elections, however, the ability of the market to sustain gains will depend on fundamentals like corporate earnings and global trends, as well as the Modi government’s actions to continue on a market reform-oriented trajectory.