Domestic-focused shares such as ICICI Bank Ltd and Ambuja
Cements Ltd soared, reflecting hopes the BJP and its National
Democratic Alliance are best placed to revive an economy growing at
its slowest in a decade, while exporters like Infosys Ltd suffered.
Analysts cautioned that the rally in markets will now need to be
justified, and a series of key tests will loom for the new
government led by Narendra Modi, including most immediately, the
selection of a cabinet.
Other critical areas for investors include the new government's
relationship with a central bank focused on inflation and the need
to deliver a budget that can reassure markets and credit agencies
about the fiscal deficit.
"Clearly financial markets have gone far ahead of fundamentals,"
said Ananth G. Narayan, co-head of wholesale banking for South Asia
at Standard Chartered in Mumbai.
"The next 100 days will be critical for the next government to
revive the investment climate."
The strong market gains come less than a year after the country was
gripped by its worst currency crisis since the balance of payment
crisis in 1991.
Although analysts also credit measures taken by the outgoing
Congress party and the Reserve Bank of India for stabilizing
markets, gains have accelerated since the BJP named Modi as its
candidate for prime minister in mid-September.
As a result, India has gone from one of the most vulnerable emerging
countries to one of the favorites among foreign investors; overseas
funds have poured more than $16 billion into Indian stocks and bonds
in the past six months.
The benchmark BSE index gained as much as much as 6.1 percent to a
record high at 25,375,63 - a gain that makes it the third-best
performer in Asia in dollar terms so far this year after Indonesia
Meanwhile the Indian rupee strengthened to as much as 58.62 per
dollar, its highest since late June 2013, marking a 17.5 percent
gain since the record low hit in August.
The benchmark 10-year bond yield fell as much as 10 basis points to
8.68 percent, its lowest since February 6.
'WALK THE TALK'
Investors will now expect the BJP to deliver. Most immediately a
Modi-led government is expected to soon name key cabinet posts such
as the finance ministry, which is widely seen as going to Arun
Jaitley, a senior BJP leader.
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Meanwhile, as the BJP focuses on reviving growth and investments, it
will need to accommodate the RBI, whose Governor Raghuram Rajan has
made fighting inflation a priority since taking the helm of the
central bank in September.
The BJP will also need to deliver a budget that investors hope will
be more realistic than the one unveiled by Congress party in
February, which tips the fiscal deficit at 4.1 percent of gross
domestic product for the year ending in March 2015.
The high markets hopes were reflected in domestic-focused shares
that would benefit most from an economic recovery.
The subindex for banks at the broader NSE index surged as much as
10.6 percent to a record high, putting its gain at 38.3 percent so
far this year. ICICI Bank surged 8 percent and State Bank of India
rose 7.5 percent.
Infrastructure-related sectors also gained on expectations the new
BJP government would focus on construction projects, sending Ambuja
Cements Ltd <ABUJ.NS> up 6.7 percent.
But shares of exporters fell, with their earnings expected to be
hurt by the surging rupee. Software outsourcer Wipro Ltd <WIPR.NS>
lost 1.6 percent and drugmaker Dr Reddy's Laboratories Ltd <REDY.NS>
dropped 2.5 percent.
Analysts warned that the market gains could be at risk should the
BJP end up disappointing investors.
"The to-do list is long and the ball is in the incoming government's
court to walk the talk on reviving growth and addressing macro
challenges," said Radhika Rao, an economist for DBS in Singapore.
(Reporting by Mumbai Markets Team; Writing by Rafael Nam; Editing by
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