Indian Stocks, Bonds, and Currency Soar: What's Behind the Surge?

India's election results took a sudden turn, with the Indian stock market reaching an all-time high on Monday, following a frantic short-covering by rampant bears...

After exit polls predicted a landslide victory for Indian Prime Minister Modi's party, the Indian stock market soared to record levels on Monday, with the Indian rupee and sovereign bonds also climbing.

The Indian SENSEX index rose by 3.51% to 76,557.94 points, setting a new record high. The Indian NIFTY index increased by 3.6% to 23,337.90 points in pre-market trading. The Indian stock market was so hot that its largest brokerage website and app seemed to crash. A spokesperson for Zerodha, one of India's largest brokerage firms in terms of user numbers, said in a phone call that some users were unable to access the company's website and mobile app.

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Modi's third term will help ensure policy continuity and boost the Indian economy as the country seeks to attract global investors. Actual vote counting will take place on June 4th (Tuesday).

India's economic growth rate is already among the world's fastest. Modi's potential victory, coupled with S&P Global Ratings' recent upgrade of India's rating outlook, could reverse the global funds' withdrawal of over $3 billion from the Indian stock market this year.

Chief Investment Officer of ITI Mutual Fund, Rajesh Bhatia, said: "Currently, the market is digesting the expectation that the government will continue to implement its economic management policies and guidelines."

Bhatia said: "We expect the government to continue its policy guidelines of large-scale capital expenditure, focusing on production-related incentives to further drive the growth cycle." He added that the new government should stay away from tax policies that harm capital investment.

Mizuho Bank's Chief Economist for Asia, Vishnu Varathan, said in reference to the main stock index of the Bombay Stock Exchange: "Driven by macro, political, and credit favorable factors, the SENSEX index's performance will outperform global and most Asian stock markets."

Analysts also pointed out that Monday's rebound in the Indian stock market was due to short-covering by foreign investors, who are closing their bearish bets. Previous data compiled by Bloomberg showed that global funds' net short positions on Indian stock index futures soared to 213,200 contracts, a new high since 2012.

Founder and Chief Investment Officer of Piper Serica Advisors, Abhay Agarwal, said: "Foreign investors need to quickly cover their short positions." He stated: "If the ruling coalition ultimately wins more than 350 seats, then the margin calls on short positions could lead the market (NIFTY index) to set a new high and approach 23,500 points on June 4th."The predictions from exit polls have come as a relief to investors, who had been concerned about a significant drop in voter turnout during the Indian elections, which raised fears about the support rate for the Bharatiya Janata Party (BJP).

On Monday, the India VIX (a 30-day implied volatility index based on option prices) at the National Stock Exchange of India plummeted by 22% at one point and was on track to close at its lowest point in over three weeks. The index has more than doubled from its low point at the end of April.

Looking at sector performance, stocks of utility companies took the lead, including those of state-owned power grid companies and NTPC Limited, India's largest power generation company. Shares of other state-owned enterprises and infrastructure-related companies also rose, with the infrastructure index and the public sector index on the Bombay Stock Exchange surging to historical highs.

Company stocks controlled by enterprises including the Adani Group and billionaire Mukesh Ambani also saw significant gains. All ten stocks of the Adani Group's port and power businesses rose, with the power sector experiencing the highest increase of up to 18%. Reliance Industries Limited, the company with the highest market value in India, saw its stock price soar by 4%.

Citigroup and Jefferies believe that if the vote count on June 4th reflects a situation similar to the exit polls, stocks in industries such as manufacturing and electric vehicles will be the main winners.

Meanwhile, as investors weigh the results of tomorrow's polls and the interest rate decision from the Reserve Bank of India later this week, India's benchmark 10-year government bond gave up some of its gains during trading, with the yield falling by 4 basis points to 6.94%, the lowest level since April 8, 2022, down 4 basis points from the previous closing. The rupee rose to 82.9575 against the US dollar, its highest level since March 19. The rupee was the second-best performing currency in Asia on Monday.