Sensex Soar as Election Anticipation Builds

The Indian stock market experienced a significant surge on Monday, driven by expectations of a decisive victory for the National Democratic Alliance (NDA) in the Lok Sabha elections. Investors rushed to buy shares, leading to the biggest gains in over three years, as the Nifty and Sensex indices soared.

The Nifty climbed 808 points, or 3.58%, reaching a day’s high of 23,338.70, before closing 3.25% up at 23,263.90. Similarly, the Sensex rose 3.75% to a record high of 76,738.89, closing up 3.39% at 76,468.78. This rally is expected to continue on Tuesday, provided the final election results align with poll predictions.

Exit polls released on Saturday projected an NDA victory with 350-370 seats, while Prime Minister Narendra Modi set an ambitious target of 400-plus seats, far exceeding the required majority of 272. Last week, Modi confidently predicted that the NDA would secure a larger majority and that the stock markets would reach new heights on June 4.

“If the results indeed surprise on the upside, say, 400 seats for the NDA, we could see another 2-3% rally before the market stabilizes and shifts focus to the upcoming budget and earnings reports,” said Raamdeo Agrawal, chairman and co-founder of Motilal Oswal Financial Services. “However, if the count is closer to 300, we might witness some profit booking. Let’s keep our fingers crossed.”

Agrawal emphasized that the long-term impact of a strong NDA victory is underestimated. “A third term for Modi with 400 seats would enhance global perceptions of his leadership and policies. This could lead to an appreciation of the rupee, increased inward remittances, and improved global credit ratings for India,” he explained.

Currently, India’s sovereign rating is just above junk status, and an upgrade would enable the country to raise funds overseas at lower costs.

Veteran investor Shankar Sharma, founder of GQuant Investech, echoed similar sentiments. “A higher margin of victory than predicted by exit polls might trigger a 2-2.5% rally on Tuesday. Beyond that, markets will refocus on quarterly results, GDP growth, and the Union budget,” Sharma said, noting that many stocks were “priced to perfection.”

Recent market rallies have led to elevated valuations, with the Nifty 50 trading at an 18.13 times one-year forward price-to-earnings multiple (P/E), against its five-year average of 17.96 times. The Nifty Midcap 150 and Nifty Smallcap 250 are also trading at higher-than-average P/Es, indicating that earnings will need to catch up significantly.

The rupee appreciated by 32 paise to 83.14 per dollar as foreign portfolio investors (FPIs) purchased shares worth a provisional ₹6,850.6 crore, surpassing domestic institutional investors’ (DIIs) purchases of ₹1,913.98 crore. The 10-year bond yield softened by four basis points to 6.94% as the rupee strengthened.

FPIs also reduced their index futures hedges, aiding Monday’s rally. They were net short on index calls and index put options, spreading their risk in case of market volatility post-election results. FPIs have been bearish on Indian shares this fiscal year, selling ₹32,080 crore through May 31, while local institutions bought shares worth ₹101,833 crore.

Nilesh Shah, managing director of Kotak Mahindra AMC, agreed with his peers regarding Tuesday’s market reaction. He stated that the markets had “discounted political continuity and would focus on the 100-day roadmap, upcoming Budget, and monsoon after Tuesday.”

The new government’s 100-day agenda is expected to focus on infrastructure, manufacturing, semiconductors, renewable energy, and housing. Proposed legislation may include amendments to insurance laws, bankruptcy laws, and measures to strengthen the National Company Law Tribunal and governance frameworks for large unlisted firms.

Modi has promised to expand the Ayushman Bharat health insurance scheme to cover all senior citizens above 75 and to unveil a Viksit Bharat Vision 2047 plan, outlining reforms to transform India into a developed economy by 2047.

“The markets will closely watch how the government utilizes the additional ₹1 trillion from the RBI dividend, which will be detailed during the Budget,” said Shah. The RBI announced a ₹2.11 trillion dividend for FY24, nearly double the expected amount.

The government plans to use the substantial RBI dividend to reduce long-term debt and increase spending on infrastructure and development projects. “Exempting or repurchasing long-term bonds with fixed coupon rates helps manage interest expenses,” a source familiar with the matter said on condition of anonymity.