How results of Lok Sabha polls will impact sensex, Nifty

Indian stocks need Prime Minister Narendra Modi’s party to win more than 303 seats in the general election to extend their record rally, according to a Bloomberg News survey of market participants.

A smaller majority for the ruling Bharatiya Janata Party may lead to a drop of about 2% in the NSE Nifty 50 Index, with the rupee and sovereign bonds also expected to fall, according to a mean of forecast by 32 asset managers, strategists and dealers. However, a victory exceeding 303 seats — the party’s count in the 2019 polls — may result in gains of about 3% in the benchmark stock gauge, the survey showed.

Winning by a landslide would give Modi the mandate needed to push through politically difficult reforms in land acquisition and labor that are seen as crucial for accelerating India’s economic growth. While investors still back Modi to win a third term, low voter turnout and reports of close contests in some areas have tempered their enthusiasm about his expected victory margin since elections began on April 19.

“If he were not to win, that would create some uncertainty and put some pressure on valuation,” Henry Mallari-D’Auria, chief investment officer for global and emerging markets at Ariel Investments LLC, said in an interview. “At this time, there is little uncertainty about the outcome of this election.”

Indian equities have risen to records, while the currency and bond markets are near their highest levels in over two months days ahead of the election results on June 4. Predictably, volatility has spiked in both the stock and rupee markets. The gauge of 30-day implied volatility on the National Stock Exchange Ltd has more than doubled from a low in April, while the same in the one-month part of the dollar-rupee options curve has steadily risen since the election began.Meanwhile, global funds have pulled $2.9 billion from local shares this month. Indian equities have trailed peers in Asia this year as rich valuations of about 20 times 12-month forward earnings and elections jitters deter foreign investors.Still, some participants foresee stock benchmarks rallying at least 20% should Modi fulfill his promise of his party and its allies winning more than 400 seats.

JM Financial Ltd, Emkay Investment Managers Ltd and UBS Group AG expect the ruling alliance to win more than 300 seats. That said, UBS in a report last week warned that a change in government could see Indian equities “test pre-Modi” valuation of about 15 times one-year forward earnings.

“The robust economic momentum combined with a larger global trade footprint by the PM suggest that on balance – a bigger majority versus elections five years ago,” said George Boubouras, managing director at K2 Asset Management Ltd. The Melbourne-based asset manager anticipates a “double-digit positive rally if BJP wins more than 400 seats.”

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