PM Modi needs to win 303-plus seats to extend stock market rally: Investors

A smaller majority for the ruling Bharatiya Janata Party might cause the NSE Nifty 50 Index to drop by about 2%.

Indian stocks need Prime Minister Narendra Modi’s party to win more than 303 seats in the general election to continue their record rally, according to a Bloomberg News survey of market participants.

A smaller majority for the ruling Bharatiya Janata Party could cause a decline of approximately 2% in the NSE Nifty 50 Index, along with anticipated drops in the rupee and sovereign bonds, according to an average of forecasts by 32 asset managers, strategists, and dealers. However, a victory surpassing 303 seats—the party’s count in the 2019 polls—might lead to gains of around 3% in the benchmark stock gauge, as indicated by the survey.

A landslide victory would provide Modi with the authority required to implement politically challenging reforms in land acquisition and labor, which are considered vital for boosting India’s economic growth. Although investors continue to support Modi for a third term, the lower voter turnout and reports of tight contests in certain regions have dampened their optimism regarding the expected margin of his victory since the elections began on April 19.

"If he were not to win, that would create some uncertainty and put some pressure on valuation," stated Henry Mallari-D’Auria, chief investment officer for global and emerging markets at Ariel Investments LLC, in an interview. "At this time, there is little uncertainty about the outcome of this election."

Indian stocks have reached record highs, while the currency and bond markets are approaching their highest levels in over two months, days before the election results on June 4.

As expected, volatility has increased in both the stock and rupee markets. The measure of 30-day implied volatility on the National Stock Exchange Ltd. has more than doubled from its low in April, while the same measure in the one-month part of the dollar-rupee options curve has steadily risen since the election began.

Meanwhile, global funds have withdrawn $2.9 billion from local shares this month. Indian stocks have lagged behind peers in Asia this year due to high valuations of approximately 20 times 12-month forward earnings and concerns about the elections, which have deterred foreign investors.

However, some observers anticipate that stock benchmarks could surge by at least 20% if Modi fulfills his promise of his party and its allies winning more than 400 seats.

JM Financial Ltd., Emkay Investment Managers Ltd., and UBS Group AG anticipate the ruling alliance to secure more than 300 seats. Nevertheless, UBS cautioned in a report last week that a change in government could lead Indian stocks to "test pre-Modi" valuations of about 15 times one-year forward earnings.

"The strong economic momentum combined with a broader global trade presence by the PM suggests that, on balance, a larger majority is expected compared to elections five years ago," stated George Boubouras, managing director at K2 Asset Management Ltd. The Melbourne-based asset manager foresees a "double-digit positive rally if BJP wins more than 400 seats."