Lok Sabha polls 2019: As India votes, here's where the stock market stands

If asset values are any indication, investors aren’t too concerned as India kicks off its elections that will decide whether Prime Minister Narendra Modi retains power.

The nation’s stocks are holding near a record hit last week, the rupee is Asia’s top-performing currency over the past month and bonds yields recently fell to this year’s lowest. While opinion polls show the ruling party winning with a reduced majority, the sentiment is being aided by a gush of foreign flows, prospects of a revival in company earnings and a further cut in interest rates.

“The prospect of a second term for Modi is a very good thing for the market,” said Robert Marshall-Lee, an investment manager at London-based Newton Investment Management Ltd. “The Modi government has put in place numerous economic reforms that will have positive consequences over a number of years to come.”

The optimism is not predicated on a Modi victory alone. Investors, including Newton, say the underlying growth momentum in Asia’s third-biggest economy and the broad commitment to economic reforms across main political parties will stay even if the opposition wrests power.

Here are where sentiments stand as the world’s largest democracy begins a marathon, six-week general election Thursday, with final results due May 23.

The currency advanced 2.3 per cent in March, becoming Asia’s best performer from being among the worst at the end of February, as foreigners bought more than $8 billion of stocks and bonds this year. The rupee also got a boost from a drop in poll-related uncertainty after Modi’s strong response to the Pulwama terrorist attacks, according to Rohit Garg, foreign-exchange and rates strategist for Asia at Bank of America Merrill Lynch in Singapore.

Bonds

After a wobbly start to the year, sovereign bonds turned a corner in March as the central bank set out on its most aggressive monetary easing in three years. Last week, it lowered rates for a second time in 2019 to support the world’s fastest-growing major economy in the face of risks both at home and abroad. The yield on most-traded bonds due in January 2028 has fallen from this year’s high of 7.67 per cent in February to 7.51 per cent on Wednesday.

“India fixed income yields currently offer a compelling carry to be availed of by domestic and foreign investors,” said Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management Co. in Mumbai.

Corporate Debt

The nation’s top-rated company bonds also rose as the central bank looks to transmit its rate cuts into the economy. While average yields on the AAA five-year corporate debt have fallen 72 basis points in the past six months, some investors say the government’s fiscal constraints pose a risk.

“Bond markets will look for two things from the new government: continued commitment toward fiscal consolidation, and while alleviating farm distress, inflation control should also be kept in mind,” said Suyash Choudhary, head of fixed income at Mumbai-based IDFC Asset Management Co.

Stock Swings

The NSE Nifty 50 Index and a gauge tracking its volatility, which almost always trade in opposite directions, have been moving together for over a month. The reason: demand for protection against swings in shares is rising as some investors weigh prospects for an election outcome going against opinion polls’ predictions.

The Nifty slid 0.8 percent on Wednesday, its biggest retreat in almost three weeks, as investors preferred to “stay light” going into elections, said A. K. Prabhakar, head of research at IDBI Capital Market Services Ltd.