India Elections 2014: Investors Will Flee Equity Markets if Modi Government Cannot Deliver

Trends and results pouring in from India's general elections put the opposition Bharatiya Janata Party-led National Democratic Alliance on course for an absolute majority, news that bodes well for equity trade in the country.

However, the current upbeat sentiment could turn sour if the incoming government fails to take concrete steps to turn around Asia's third-largest economy.

Trends predict the National Democratic Alliance (NDA) will bag over 300 of the 543-seats up for grabs, paving the way for Bharatiya Janata Party's (BJP) Narendra Modi to become India's next prime minister.

The news has provided a further boost to equity trade in the country. The main stock index, the S&P BSE Sensex, which got off to a roaring start with a 1,300 points rally at around 10:30 hrs IST, was trading 2.12% or 507.79 points higher to 24,413.39 at 13:30 hrs IST.

The CNX Nifty, which breached the 7,500 mark in the morning, was trading 2.31% or 164.85 points higher to 7,288.00 on 16 May.

The Sensex has surged 21% over the past six months while the Nifty has jumped 21.4%.

Incoming trends and results point to an end to coalition politics in India, long considered an impediment to growth in the Indian context.

Expectations now that business-friendly Modi will shepherd a stable government, which can revive economic growth from a decade's low, are to boost Indian stocks further, provided Modi's government can deliver on its promises.

Failing to do so could compel investors to flee.

"Given the high expectations, if the next government fails to produce tangible results quickly, market sentiment could sour as the economy's weaknesses, such as stubbornly high inflation, resurface on investors' radars," Miguel Chanco, India economist at Capital Economics told IBTimes UK.

Standard Chartered said in a 15 May note to clients: "...An NDA win should be positive for INR markets, given the perceived greater stability of the new government. We have a Positive outlook on the INR bond market and maintain our recommendation to be long INR 5Y bonds."

It has been a string of record highs for India's $1.2tn equity markets lately with investors pricing in a clear victory for the BJP and its allies for a while now. Exit polls were bang on target this time around.

Earlier in the week, a Macquarie Research report said the markets had priced in the BJP winning 230 parliamentary seats.

That number, Macquarie said, could trigger gains of 5% to 10% over one month in Indian shares, while a number above 240 seats would set off gains of 15% to 20%.

While optimistic investors have returned to India's equity markets, analysts have advised caution.

Analysts told IBTimes UK that investors must tread with caution given that the current level of optimism does not correspond with the fundamentals of the economy.

Growth in India, under South Asia's longest serving prime minister Manmohan Singh, has dropped to a decade low 4.5% from a high of about 9.6% in the fiscal year 2006-07.