The Indian stock market looks set to surge on Monday on expectations the clear election victory of the ruling coalition would lead to a strong and stable government that would accelerate the pace of economic reform.
The rupee is expected to strengthen past 49 per dollar and bond yields are set to fall as the outcome should be encourage foreign investors and sharply lowers the risk of instability leading to a ratings downgrade, analysts said.
Prime Minister Manmohan Singh’s left-of-centre coalition was heading for a second term after a clear victory in the general election.
“The markets could go up anywhere between 1,100-1,300 points over the next two to three days because you cannot have asked for a better combination,” said Arun Kejriwal, strategist at KRIS, said of the share market.
Such a jump would see the benchmark stock index rising about 9 to 11 percent towards 13,500 in the first half of next week, its highest since last September.
Analysts said the fact Congress would not have to rely on parties such as the Left for support meant it would be easier to push through economic reforms to pull up flagging growth.
Edelweiss Capital said strong global liquidity and a stable government would boost the stock market, and said the ruling coalition’s victory would be positive for the banking, insurance, capital goods, retail, real estate and the telecom sector.
The benchmark stock index rose 2.5 percent to 12,173.42 points on Friday, posting a 10th successive weekly gain. The market has soared more than 50 percent from a 2009 low in early March on a revival in foreign capital inflows.
Foreign investors have bought $1.8 billion in May of stocks in May after more than $1 billion in April, and investors expect the inflow pipeline to remain strong in the coming months.
“A government without the Left is a positive outcome for markets,” said Phani Sekhar, fund manager at Angel Trade.
“The new government’s policy is going to be vastly different, especially in the case of reforms in the financial services sector and the privatisation of select state firms,” Sekhar said.
Edelweiss recommended buying stocks such as telecom Bharti Airtel, infrastructure firms Larsen and Toubro and Reliance Infrastructure, Kotak Mahindra Bank and auto maker Mahindra and Mahindra.
Foreign buying of stocks is a key influence on the rupee, which has gained about 5 percent from a record low of 52.2 per dollar in early March as shares have surged.
Traders said the expected gains in stocks and buoyant confidence could see the rupee rise to three-month highs around 48.70-48.90 on Monday from Friday’s close of 49.41/42 per dollar.
“Importer demand for dollars will also be muted with the political uncertainty behind us, and, if global conditions continue to improve, we may see the rupee go up to 48.50 in the coming weeks,” said the head of FX trading at a foreign bank.
There should also be some buying of bonds, but the fall in yields will be limited by concerns over the budget deficit and the risk of it widening further to meet campaign promises.
In an interim budget in February, the government forecast record gross borrowings of 3.6 trillion rupees ($73 billion) in 2009/10. A revised budget will be released before end-June.
Ratings agency Fitch has said if India did not address a deterioration in the structural weaknesses of public finances, it could undermine sovereign ratings.
Ten-year bond yields rose for a second day on Friday to end at 6.42 percent, up 19 basis points so far this month.
Traders said bond yields could trend lower as the election outcome meant interest rates would remain low and the government could explore other ways to raise funds, such as selling off stakes in state-run firms and auctioning 3G spectrum.
But with combined state and central deficits topping 10 percent of GDP and growth set to slow to about 6 percent in 2009/10, a seven-year low, markets still have hurdles ahead.
“After the initial euphoria and the honeymoon period we will have to get down to the hard facts, which is that the global economy is not improving and the government can’t just waive a magic wand and eliminate our fiscal deficit,” Kejriwal said.
(Additional Reporting by Prathish Narayanan)
This article is provided by Thomson Reuters. All rights, including copyright, in this content/article provided by Reuters are owned or controlled by Thomson Reuters. The content may not be copied, broadcast, downloaded and stored (in any medium), transmitted, adapted or changed in any way whatsoever without the prior written permission of Thomson Reuters.