After staging impressive rallies in the run-up to elections, Indian stocks and the rupee have scope for further upside, said a report by Goldman Sachs.
"The general elections in India resulted in an unequivocal verdict in favour of the opposition BJP, and there is substantial momentum behind the prospects for economic reform.
"Expectations of a market-friendly outcome have seen Indian equities, the INR and INR swaps rally - and the key question now is whether these moves can extend. Our general answer to that question is a qualified 'yes'...." Goldman Sachs said in a research note.
Indian equities, rupee and rupee-swaps have all seen rallies of varying intensity in anticipation of a reformist government and post elections these moves are likely to extend further, it said.
Though the large Parliamentary majority will allow the new government to undertake previously stalled reforms, transplanting the model of effective administration from Gujarat to the national level, where there are many more disparate constituencies and vested interests, is likely to take some time, the report said.
Year-to-date, India has been one of the best-performing emerging equity markets.
The 50-share index NSE Nifty is up almost 15% in the local currency, with about half of that return coming in the last couple of weeks as optimism around the election results built.
After staging impressive rallies in the run-up to election, the BSE benchmark Sensex briefly breached the crucial 25,000-mark on May 16, the day votes were counted. The index in its last trade had recorded its historic closing high of 24,693.35.
On rupee, the report said, it is likely to remain "steady" as positive policy dynamics and capital inflows push the currency stronger, but the RBI is likely to resist too much spot appreciation.
The local currency had strengthened to its 11-month high of 58-level last week.
Goldman Sachs Asian Equity Strategists have maintained their overweight stance on India within the Asia-Pacific (ex- Japan) region and have raised their 12-month Nifty target to 8,300, implying about 15% upside from current levels.
According to Goldman Sachs, the rupee is likely to be around 58.5/USD in the next three months, 61/USD in next six months and 63 in next 12 months time.
The report further noted a clear mandate for the BJP has rekindled hope for structural reforms and better investment climate and the country's growth is likely to accelerate to 6.5% in FY16.