Mumbai: Indian shares on Friday surged to record highs while the rupee strengthened to an 11-month peak against the dollar as the opposition Bharatiya Janata Party and its allies were set to sweep the country's elections with an absolute majority.
Domestic-focused shares such as ICICI Bank Ltd (ICBK.NS) and Ambuja Cements Ltd (ABUJ.NS) soared, reflecting hopes the BJP and its National Democratic Alliance are best placed to revive an economy growing at its slowest in a decade, while exporters like Infosys Ltd (INFY.NS) suffered.
Analysts cautioned that the rally in markets will now need to be justified, and a series of key tests will loom for the new government led by Narendra Modi, including most immediately, the selection of a cabinet.
Other critical areas for investors include the new government's relationship with a central bank focused on inflation and the need to deliver a budget that can reassure markets and credit agencies about the fiscal deficit.
"Clearly financial markets have gone far ahead of fundamentals," said Ananth G. Narayan, co-head of wholesale banking for South Asia at Standard Chartered in Mumbai. "The next 100 days will be critical for the next government to revive the investment climate."
The strong market gains come less than a year after the country was gripped by its worst currency crisis since the balance of payment crisis in 1991. Although analysts also credit measures taken by the outgoing Congress party and the Reserve Bank of India for stabilizing markets, gains have accelerated since the BJP named Modi as its candidate for prime minister in mid-September.
As a result, India has gone from one of the most vulnerable emerging countries to one of the favorites among foreign investors; overseas funds have poured more than $16 billion into Indian stocks and bonds in the past six months.
The benchmark BSE index .BSESN gained as much as much as 6.1 percent to a record high at 25,375,63 - a gain that makes it the third-best performer in Asia in dollar terms so far this year after Indonesia and Pakistan.
Meanwhile the Indian rupee strengthened to as much as 58.62 per dollar, its highest since late June 2013, marking a 17.5 percent gain since the record low hit in August. The benchmark 10-year bond yield fell as much as 10 basis points to 8.68 percent, its lowest since February 6.
Walk the talk: Investors will now expect the BJP to deliver. Most immediately a Modi-led government is expected to soon name key cabinet posts such as the finance ministry, which is widely seen as going to Arun Jaitley, a senior BJP leader.
Meanwhile, as the BJP focuses on reviving growth and investments, it will need to accommodate the RBI, whose Governor Raghuram Rajan has made fighting inflation a priority since taking the helm of the central bank in September.
The BJP will also need to deliver a budget that investors hope will be more realistic than the one unveiled by Congress party in February, which tips the fiscal deficit at 4.1 percent of gross domestic product for the year ending in March 2015. The high markets hopes were reflected in domestic-focused shares that would benefit most from an economic recovery.
The sub-index for banks at the broader NSE index surged as much as 10.6 percent to a record high, putting its gain at 38.3 percent so far this year. ICICI Bank (ICBK.NS) surged 8 percent and State Bank of India (SBI.NS_6">SBI.NS) rose 7.5 percent.
Infrastructure-related sectors also gained on expectations the new BJP government would focus on construction projects, sending Ambuja Cements Ltd (ABUJ.NS) up 6.7 percent. But shares of exporters fell, with their earnings expected to be hurt by the surging rupee. Software outsourcer Wipro Ltd (WIPR.NS) lost 1.6 percent and drugmaker Dr Reddy's Laboratories Ltd (REDY.NS) dropped 2.5 percent.Analysts warned that the market gains could be at risk should the BJP end up disappointing investors.
"The to-do list is long and the ball is in the incoming government's court to walk the talk on reviving growth and addressing macro challenges," said Radhika Rao, an economist for DBS in Singapore.
