Exit polls indicate a big win for the Bharatiya Janata Party and Indian stocks saw a notable bounce with the SENSEX up nearly 6% at one point. While victory was expected, the scale of the win surprised investors.
“The reaction of the SENSEX to the prospect of Modi ascending to power stands in stark contrast to how markets welcomed outgoing PM Manmohan Singh ten years ago,” said JPMorgan Asset Management strategist Alex Dryden.
“In May 2004, the SENSEX fell by over 15% as exit polls suggested Singh was set to triumph, its biggest monthly fall in over a decade, this time around the Indian stock market has advanced over 5%,” he added.
Dryden warned that investors should be wary of jumping to conclusions about Modi’s ability to revitalise India’s economy immediately due to the country’s infamous thick red tape and bureaucratic machine.
Sam Vecht, manager of the BlackRock BSF emerging markets absolute return fund was less reserved in his assessment of events. "Narendra Modi and the BJP's stunning election win has rightly been hailed as the beginning of a 'New era' for India, he and his party will have a mandate to reform and change the country that no other government has enjoyed for a generation,” he said.
“We are long term bulls on India, given its entrepreneurial culture, industrious workforce and high savings rate,” Vecht added. He did however acknowledge that changing India's business culture is going to be a “monumental task” that will take time.
The IMF is unlikely to be quite so excited as this result would point to an increase in a trend which concerns it. According to Bank of America Merrill Lynch, The IMF's Financial Stability Report argues that the recent capital inflows into emerging markets like India may be destabilizing. It says price volatility could be amplified by high levels of portfolio flows, increases in bonds relative to equities, increased corporate issuance in foreign currency and changes in market structure.
