After an initial period of volatility in the aftermath of unexpected election results, the Nifty 50, India’s leading equities benchmark, has hit record highs as the South Asian country appears set to benefit from significantly higher levels of foreign investment.
The incumbent prime minister, Narendra Modi, was widely expected to win a sizeable majority and markets largely welcomed that prospect. Markets were largely optimistic about the prospects of a substantial Modi majority because of his efforts in government to drive spending in manufacturing, power, defence, and infrastructure, which has boosted activity in these industries and contributed to India having some of the highest economic growth rates in the world.
While Modi’s Bharatiya Janat Party did secure a victory, they no longer hold a majority in the Indian parliament. Markets therefore feared that Modi would have to compromise on his market-friendly agenda. However, it is becoming increasingly clear that India will see a high degree of policy continuity. Indeed, Raghuram Rajan, the former head of the Indian central bank, said recently that “there is a lot of continuity built into Indian policy […] whatever government comes in will take a lot of the good stuff that has been done and continue it.”
This has calmed post-election nerves and sent equities soaring to record high. The Nifty index is now up over 11% since the election results were announced at the start of June.
Harsh Agarwal, a hedge fund manager in Mumbai, told Disruption Banking that “a disappointing election outcome for the ruling government became a blessing in disguise for Indian equities.”
“The underperforming sectors, primarily those that are consumer-facing, came back on the expectation that there will be beneficial policy changes. At the same time, government officials indicated that their efforts to boost manufacturing will remain unchanged,” he said.
“This, along with all time high investment inflows in equities, triggered a very broad-based rally with participation from nearly all sectors.”
Agarwal also noted that broader macroeconomic developments have further boosted inflows into Indian markets, including equity markets. Perhaps most importantly, JPMorgan recently included India in the bank’s emerging market debt index. The JPMorgan indices are a popular benchmark for money managers that trade and deal in emerging market debt. JPMorgan has estimated that foreign inflows into India will be between $20-25 billion following its inclusion in the index.
“Inflows into the bond market from India’s inclusion in JP Morgan bond index means that liquidity will remain high over next one to two years,” Agarwal said. “Investors in Indian equities will get used to valuations being high to super high. A stock is a “buy” if it is only approximately 20% overvalued on your DCF model.”
Anubhav Sahu, an equity research analyst at Moneycontrol Research in Mumbai, similarly noted that this increased liquidity is likely to boost Indian markets in the months and years ahead.
“After having initial jitters following the general election results, the Nifty has risen by 11% since the election result day. In the least year, Nifty has increased by 24%, almost in sync with the S&P500, which is up 25%,” Sahu told Disruption Banking. “That said, valuations for the broader Indian equities’ indices are certainly ahead of long-term average.”
“Before the election, the major factor driving equity markets higher was the liquidity from domestic institutional and retail investors, but this has now changed. Foreign institutional investors (FIIs) have also joined the party.”
“In the last forty days, FII inflows to Indian equities have been to the tune of $3.5 billion. And this momentum is expected to increase as Federal Reserve is expected to initiate policy rate cuts sometime soon. The Chair of the Federal Reserve, Jay Powell, recently testified in the US Congress and that testimony suggested progress for labour market softening and dis-inflation trajectory is encouraging,” Sahu said.
The broad economic picture is looking bright for India. S&P Global Ratings recently upgraded India’s economic outlook from “stable” to “positive” while the Reserve Bank of India has revised growth projections for 2025 from 7% to 7.2%. These trends, particularly as India opens up to further foreign investment, should drive higher prices on both foreign exchange and equity markets.
“FII inflows to India should increase in response USD/INR appreciation along with stable policy, fiscal discipline, and a steady corporate earnings cycle,” Sahu said. “That said, investors should keenly watch for the government’s policy choices in the upcoming budget. We believe in near term, policy tailwinds along with bottom-up stock selections remains key.”
Author: Harry Clynch
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