Indian stocks hit record and ETFs climb as exit polls show Modi's party headed to third term

By Barbara Kollmeyer

International, rather than domestic investors may have driven the rally, data shows

Indian stocks climbed to a record on Monday, following several days of selling, after exit polls pointed to an election win for Prime Minister Narendra Modi's Bharatiya Janata Party.

India's BSE Sensex IN:1 closed up 3.4% to 76,468, the biggest one-day percentage gain since February 2021 and a new record, according to Dow Jones Market Data. That took out last week's record above 75,000. The Sensex had seen five straight days of selling.

The dollar (USDINR) fell nearly 0.4% to 83.12 rupees.

Voting in the country's general election ended Saturday, and the official counting begins Tuesday. But major news channels were predicting Modi and his BJP party - as it is referred to - will beat a broad alliance of opposition parties for a third term, according to the Associated Press. BJP and allies could gain more than 350 seats out of 543 - just 272 are needed to form a government, those projections indicated.

U.S. investors were also swept up in the rally, with the iShares MSCI India ETF INDA and the WisdomTree India Earnings Fund EPI climbing 3.9% and 3.3%, respectively.

Those ETFs appear to have an edge over emerging markets overall. The iShares and WisdomTreet India ETFs are up 8.6% and 11%, respectively this year (up 16% and 25% in 2023). But the iShares MSCI Emerging Markets ETF is up just 3.9% this year, after a 6% gain in 2023.

And foreign investors appeared to be at the driver's seat of Monday's gains. Provisional data from the country's National Stock Exchange on Monday showed that domestic institutional investors bought a net 19.14 billion rupees ($230 million) worth of Indian shares, while foreign institutional investors scooped up a net 68.51 billion rupees ($824 million) in stock.

Luring them in, India's stock market hasn't had a losing year since 2015, with five years of double-digit gains in the period up to this year. That's as domestically, trading has taken off due to fast economic growth that has pushed millions into the middle class. Options bets have also been exploding in recent years, with those also pointing to a win for Modi's party.

"India remains a beacon of growth with a minimum of 6-6.5% real GDP growth and 10-11% nominal growth over the next several years," said Deutsche Bank's Kaushik Das in a note to clients on Monday. That said, the country also has gaping inequality with Oxfam pointing out that the top 10% of the Indian population holds 77% of the total national wealth.

Analysts at Jefferies recently offered some caution over the massive domestic equity inflows seen during 2024 so far - a whopping $7 billion a month.

"At [approximately] 20% of financial savings, and with the 'predictable' flows to equity at less than half, risk of domestic flow reversal is rising. Potential regulatory action on derivatives could be a trigger," a team led by Mahesh Nandurkar wrote in a recent note.

A repeat win for Modi could still be positive for some stocks that have been lagging the larger index, Nandurkar and his team wrote in a separate note on Sunday.

"A cyclical upturn is under way in private capex, and political stability alongside, continue to make us like capex plays (real estate, industrials, power) from a long-term perspective. However, a tactical breather is likely," given domestic investors are already heavily invested, they cautioned.

Among stocks in India that saw the biggest gains on Monday were those linked to the country's richest individual, Gautam Adani. The ports-to-power conglomerate struggled throughout 2023 after allegations of fraud from a short seller against Adani Group, which the company denied.

Shares of Adani Enterprises Ltd. (IN:512599), which last month recaptured levels not seen since before short seller Hindenburg's accusations surfaced, climbed over 6%. But the big winners were Adani Power Limited (IN:533096) and Adani Ports & Special Economic Zone (IN:532921), up 15% and 10%, respectively. Adani companies can be found in both U.S. India ETFs.

-Barbara Kollmeyer

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06-03-24 0943ET

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