Indian stocks, rupee drop as early count signals narrow Modi win

MUMBAI - Indian stocks slid on June 4, erasing gains that had pushed key indexes to record highs, as initial tallies of the national election signaled only

a narrow victory for Prime Minister Narendra Modi-led Bharatiya Janata Party

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The NSE Nifty 50 Index tumbled as much as 4.2% in Mumbai, the biggest intra-day drop in more than two years, as early counts showed a slimmer majority for Modi than the exit polls. The rupee fell by the most in 10 months against the dollar after rallying in the previous session. 

Volatility spiked as the Election Commission of India counts votes, with a gauge of 30-day ahead implied swings on the NSE jumped as much as 17%. A clearer view of the results will only emerge within the next few hours. An index of so-called Modi stocks, as termed by CLSA, slumped over 5% with Adani Group’s flagship unit Adani Enterprises Ltd. among the biggest decliners. 

“The market is priced for 400 seats for the BJP-led alliance and it seems that is definitely not coming now,” said Amit Kumar Gupta, chief investment officer at Fintrekk Capital. “Investors are a little nervous and that will stay so for the next couple of hours till leads are firmly established.”

Opposition leaders had dismissed the polls, holding onto their predictions that their alliance of more than 20 groups, led by the Indian National Congress, would win 295 seats. The polls had predicted the BJP-led alliance would win over 350 of the 543 seats in the lower house of parliament.

To be clear, the BJP-led alliance is still set to win a third term, which investors are banking on continuity in the government’s infrastructure and manufacture-led drive to boost growth.

“I still think the policy direction of Modi will likely stay, which should support India’s economy in the longer term,” said Dong Chen, chief Asia strategist at Banque Pictet. “The valuations are expensive but we will be watching for any correction closely as it may create some entry opportunities.”

Still, a narrow victory for Modi will bring into focus the new government’s ability to push through politically difficult reforms in land acquisition and labor laws – seen as crucial by some investors to sustain India’s economic growth at over 7.5%.

Modi had promised that his party and allies will deliver over 400 seats touting his administration’s efforts on boosting capital formation that has partly helped propel India’s economy as the fastest growing in the world.

“Indian markets were trading at 140% market cap-to-GDP,” said Sameer Kalra, founder of Target Investing Pvt., referring to the expensive equity valuations. “If there is some uncertainty in future policy moves there can be a major correction.” BLOOMBERG