Modi Awaits Fate as Indian Markets Already Cheer Third Term Win

(Bloomberg) -- India will announce election results Tuesday, with investors already cheering a third term victory for Prime Minister Narendra Modi based on exit polls, pushing stocks to a record.

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The Election Commission of India will begin counting votes at 8am local time, with broad trends likely to emerge within a few hours. Some 642 million Indians out of nearly 1 billion registered voters went to the polls in a marathon six-week election that took on an increasingly bitter tone as voting proceeded in seven phases across the country.

Exit polls released Saturday predicted a landslide victory for Modi’s Bharatiya Janata Party and its allies with a win of more than 350 of the 543 seats in the lower house of parliament. That would enable Modi’s party to push through policies that are seen as crucial for boosting India’s economic growth, already among the world’s fastest.

“The kind of capital expenditure this government has done, if that is continuing the next five years, the kind of GDP growth, and the multiplier effect on economy and the tax collections is going to be visible,” Feroze Azeez, deputy chief executive officer of Anand Rathi Wealth Ltd., said in an interview on Bloomberg TV on Monday.

The NSE Nifty 50 Index rallied 3.3%, its biggest surge in over three years, while the rupee was the second-best performing currency in Asia on Monday.

The exit polls offered relief for investors after low voter turnouts and tight races in some states led to a jump in market volatility amid concern that the BJP might fall short of Modi’s 400-seat target.

The projected victory along with the recent upgrade of India’s ratings outlook by S&P Global Ratings may lead to a reversal of more than $3 billion of withdrawals by global funds from local shares this year.

Monday’s rally also benefited from other factors including short-covering by foreign investors, faster-than-expected economic growth data that came after market hours Friday, and a rally in the US markets.

“Indian risk assets are in a goldilocks macro environment defined by benign inflation and strong economic growth,” said Marko Papic, chief strategist at Clocktower Group LP. He said the revival of domestic capex, shift of global capital from China and an “unusual exuberance” among local investors are among drivers fueling the rally in Indian equities.

Modi has used a combination of business-friendly policies, welfare measures for the poor and Hindu nationalist policies to appeal to a broad group of supporters. He was key to the BJP’s election campaign, and a big win will likely strengthen his position in the party and as the country’s leader.

Investors perceive Modi as a more market-friendly politician compared with his rivals, who have campaigned on promises to waive farmers’ debt and improve welfare policies. Official data last week showed the economy grew more than 8% in the fiscal year that ended in March, with the central bank predicting a rapid pace of 7% growth this year.

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Opposition leaders dismissed the exit polls, holding onto their predictions that the alliance of more than 20 groups, led by the Indian National Congress, would win 295 seats in the parliament.

The NSE’s India Volatility Index, a measure of 30-day implied swings based on options prices, nosedived 15% to two-week low. The gauge had more than doubled from a low in late April.

S&P BSE 500 Index, among the most broader gauges in India, jumped 3.3% to an all-time high. The rally was led by utilities companies that included Power Grid Corp. and NTPC Ltd., the country’s biggest power generator.

Shares of other state-run companies and infrastructure-linked firms also rallied as a bigger mandate for Modi-led alliance means the government will likely boost capital spending. BSE Ltd.’s gauge of state enterprises surged 7.7%, while an index of capital goods firms added more than 5%.

The stocks of companies controlled by corporates including the Adani Group and billionaire Mukesh Ambani were also among winners. All 10 shares of ports-to-power Adani conglomerate rallied, led by its power unit, which soared as much as 18%. Reliance Industries Ltd., India’s most valuable firm, surged 5.6% to a record.

The benchmark 10-year bond pared some gains, as investors look toward the poll results tomorrow and the Reserve Bank of India’s rate decision on Friday. Yields fell as much as 4 basis points intraday to 6.94%.

--With assistance from Subhadip Sircar, Malavika Kaur Makol, Chiranjivi Chakraborty, Kartik Goyal and Preeti Soni.

(Updates with additional details.)

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