Indian Stocks Lead Gains in Asia as Modi Ally Pledges Support

(Bloomberg) -- Indian stocks rebounded after a key ally of the political alliance led by Prime Minister Narendra Modi’s party affirmed support for the formation of the next government.

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N. Chandrababu Naidu, leader of regional Telugu Desam Party, pledged his party’s commitment to the National Democratic Alliance. Modi’s Bharatiya Janata Party lost its majority in parliament and needs to rely on allies to stay in power in for a third term.

The NSE Nifty 50 Index jumped 3.4% in Mumbai, its biggest gain in more than three years. The benchmark had tumbled by the most in four years on Tuesday. Shares of consumer companies were among the biggest gainers, while most Adani Group’s shares advanced. The rupee closed 0.2% higher and bonds gained.

Firm support from a key ally after Tuesday’s rout that erased almost $400 billion in market value helped allay doubts about Modi’s ability to stay in office for a third term. Some investors have been concerned that a weak coalition government will likely hinder tough economic reforms.

“While there are political uncertainties, India’s solid macroeconomic position and ongoing policy focus provide a positive long-term outlook for the market,” said Evan Metcalf, chief executive officer at Global X ETFs Australia. The government’s focus on infrastructure and manufacturing will continue despite the “challenges of coalition politics,” he said.

Investors await outcomes of meetings later on Wednesday by the BJP-led alliance and the opposition grouping to chart the next steps.

Meanwhile, the India VIX Index, a gauge of 30-day ahead implied swings, slumped almost 30% after surging to more than a two-year high Tuesday.

“We expect realized and implied volatility to ebb in the coming days from its level on June 4,” Morgan Stanley strategists led by Ridham Desai wrote in a note. The ruling alliance has passed the halfway mark and is likely to form the next government, they wrote.

India’s stock market plunged on Tuesday as Modi’s ruling party failed to win a majority in national elections, a stunning result after exit polls showed he was on pace for a landslide victory. The BJP won 240 of the 543 seats in the lower house of parliament, versus 303 seats secured in the 2019 election.

“The election outcome is a near-term derating event for the markets, with most impact on recent winners” like public-sector stocks, select industrials and realty, Jefferies Financial Group Inc. strategists including Mahesh Nandurkar wrote in a note. The “likelihood of welfare spending/populist announcements by the coalition government in the July budget, alongside forecast good monsoon rainfalls, favors the rural recovery theme.”

The Nifty tumbled as much as 8.5% at one point, coming close to hitting its first circuit limit since the Covid-era crash in March 2020. The selloff echoed the 2004 elections, when the BJP’s unexpected defeat triggered a market crash.

Indian stocks will look past the uncertainty caused by elections as corporate earnings and the nation’s economic stories are still intact, Goldman Sachs Group Inc. strategists including Sunil Koul wrote in a note.

“We remain constructive on Indian equities and see this weakness as an opportunity to accumulate,” they said.

--With assistance from Abhishek Vishnoi.

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