Modi Win Spurs Jump in Indian Stock Futures, Rupee Forwards

BJP supporters celebrate party’s performance in the assembly elections in Bengaluru on 11 March 2017. (Photo: IANS)

India’s stock futures and currency forwards jumped after Prime Minister Narendra Modi’s bigger-than-expected win in state elections increased expectations for a continuation of his reform agenda.

Modi’s Bharatiya Janata Party won 312 seats in the 403-member assembly of Uttar Pradesh, according to the Election Commission of India, up from 47 in 2012. The results of the race in India’s largest state were seen as a litmus test of Modi’s popularity and reforms, including opening up the country to more foreign investment, and seeking to introduce a goods and services tax, ahead of general elections in 2019.

“Though markets expected the BJP to do well in polls, the ultimate result surpassed even the most optimistic assumptions,” said Vivek Rajpal, a rates strategist at Nomura Holdings Inc in Singapore. “These election results increase the expectation towards further reforms” and will be treated “very positively,” by markets, he said.

India’s SGX Nifty 50 Index Futures rose 2 percent as of 11:29 am in Singapore. The contracts advanced as much as 2.3 percent to 9,164 earlier, suggesting the Nifty 50 Index will reach a record when onshore markets open Tuesday after a public holiday on Monday.

One-month non-deliverable forwards strengthened 0.5 percent, the most since 8 February, to 66.37 a dollar. They reached 66.34 earlier, the strongest intraday level since 4 April 2016. The rupee closed at 66.605 on Friday.

India’s economic growth has been 7 percent or more in each of the last four quarters, which has helped lure $3.4 billion of foreign funds into the nation’s stocks and bonds this year.

The benchmark S&P BSE Sensex Index has advanced 8.7 percent in 2017, and the rupee has strengthened 2 percent against the dollar. The yield on the country’s 10-year sovereign bonds has risen 39 basis points to 6.90 percent as investors position for a likely Federal Reserve interest-rate increase this week.

The election result paves the way for more reforms and should lead to more inflows, supporting the rupee and asset prices, said Khoon Goh, the Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd. Bond yield are likely to drift lower, although this will be offset by the potential Fed hike and rising euro area yields, said Nagaraj Kulkarni, a senior Asia rates strategist at Standard Chartered Plc in Singapore.

Demonetisation Repudiation

While exit polls released last week suggested a large BJP victory was possible in Uttar Pradesh, the scale of the win was stark in a state that has long been divided along religious and caste lines. It is also a repudiation of political foes who assumed that Modi’s disruptive 8 November move to remove high-denomination notes would be politically unpopular.

It’s clear that Modi has very high popularity and credibility, which means the BJP is “certain to be re-elected” in 2019, said Sook Mei Leong, the Singapore-based Southeast Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. “This is very positive for India because the theme of the demonetisation move is part of the attempt to curb corruption.”

Indian stocks should do well, while rupee NDFs are reflecting the dollar’s decline Friday as well as the election results, said Leong. The rupee will probably be “relatively rangebound” around 66 a dollar on Tuesday and is unlikely to strengthen to 65 because of the probable Fed tightening, she said.

This story was originally published on BloombergQuint.