Opinion Ahead of poll results, the rise and rise of Indian stock markets

On Monday, the Indian stock markets soared to record highs during early trade. The BSE Sensex opened 2,622 points or 3.5 per cent higher at 76,583. The Nifty rose 3.58 per cent to 23,338. The rally was across the board. The BSE small- and mid-cap indices also hit fresh highs. The small cap index ended the day up 2.05 per cent, while the mid cap index closed 3.54 per cent higher. Public sector stocks also registered impressive gains — the BSE PSU Index was up 7.67 per cent, while the Nifty PSU Bank index was up 8.4 per cent. The Indian rupee also strengthened to a two-month high of 83.14 against the dollar. And the Nifty VIX, a fear gauge, which had risen sharply over the past few weeks, indicating investor nervousness, fell on Monday by almost 15 per cent.

There are several triggers for this rally. On Saturday, the exit polls indicated a return to power of the ruling dispensation with a comfortable majority. Investors are likely to have been enthused by the prospects of continuity in governance — political stability often begets policy stability and continuity. A day before that, the National Statistical Office had released data which showed that the Indian economy had grown at 8.2 per cent in the last financial year — this estimate surpassed expectations of most analysts. Moreover, the economic momentum is likely to have continued in the weeks thereafter. As per a study by economists at the RBI, the economy is likely to grow by 7.5 per cent in the first quarter of the ongoing financial year. Also on Friday, data on government finances released by the Controller General of Accounts showed that the Centre had managed to restrict its fiscal deficit to 5.6 per cent of GDP, lower than the revised estimate of 5.8 per cent. The 10-year bond yield is now below 7 per cent. A few days before that, S&P Global had changed its outlook on India to positive, and indicated the possibility of a ratings upgrade in the next two years. Global markets have also been upbeat. On Friday, the Dow Jones Industrial Average rose 1.51 per cent. Data released on Friday showed that inflation in the US had stabilised with personal consumption expenditures rising 2.7 per cent in April, in line with the March reading. On Monday, European stocks started higher, as expectations of the European Central Bank cutting interest rates at a meeting later this week gained traction. Also on Monday, the Caixin/S&P Global manufacturing purchasing managers index showed that factory activity in China grew at a fast pace in May, contradicting an earlier assessment.

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How Indian markets behave now will be determined by the results of the national elections and the policy expectations from the next government.