Indian Stocks Recoup Losses Sparked by Modi’s Election Upset

(Bloomberg) -- Indian stocks surged to a new all-time high, recouping losses from Tuesday’s unexpected election result that triggered a record selloff in the world’s fifth-largest equities market.

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The NSE Nifty 50 Index closed 2.1% higher at 23,290, bringing its weekly gain to more than 3%. The surge over the past three sessions came as Prime Minister Narendra Modi’s party got allies to form a government. The central bank’s decision to hold its benchmark interest rate while raising economic growth projection also contributed to the advance on Friday.

A fresh high at a time when concerns about the sustainability of India’s premium valuation are growing and foreign withdrawals are rising underscore the growing heft of domestic investors in India’s almost $5 trillion equity market.

The gains after RBI’s policy, where it said the economy will grow at 7.2% this year, against the earlier forecast of 7%, signal the India story has many more drivers. India’s economic upcycle is likely to continue in the long term due to factors such as a rising middle class and strong demographics.

The rate decision comes just days after the Bharatiya Janata Party lost its majority in parliament, forcing it to share power in a coalition government. That has spurred some concern over potential fiscal populism.

The BJP-led alliance met in New Delhi on Friday and accepted Modi as the leader for the coalition. Modi and his council of ministers are expected to be sworn in by India’s president on Sunday, according to the Press Trust of India.

RBI’s growth projection change is the biggest positive surprise, according to Shrey Jain, chief executive of New Delhi-based brokerage SAS Online. “Equity investors should now look for the details of the formation of the government while expecting a pro-growth budget.”

While most stocks rallied on Friday, the shares of state-run enterprises are yet to recover from Tuesday’s sharp selloff. Their sector index is the worst performer among the National Stock Exchange of India’s industry gauges this week after falling about 2%.

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