Modi’s third term can still be lucky for Indian stocks

INDIA’S newly re-elected Prime Minister Narendra Modi has overseen a decade of economic growth that has lifted millions of Indians into the middle classes and driven a threefold surge in the country’s main stock index.

But the Bharatiya Janata Party’s unexpectedly narrow victory has led equity investors to question whether a historic third term for Modi will be just as lucky for Indian stocks. The BSE Sensex tumbled by as much as 6,200 points at one point as results emerged on Jun 4, closing down 4,390 for a 5.74 per cent loss on the day. Three days later, it was back above the pre-election benchmark, going on to mark another all-time high towards the end of June. According to Bloomberg data, as at Jun 21, global funds had been net buyers of Indian equities for 10 days straight, adding a cumulative US$3.4 billion.

After such dramatic price swings, it seems highly likely that Modi’s third term will coincide with a more volatile period for Indian stocks than his first two. The market’s response shows emphatically that global enthusiasm for India’s growth potential has left the stock markets with little room for disappointment. Valuations are rich, to say the least: the average price-earnings ratio more than 40 per cent from 2013, the year before Modi’s first term. The gauge’s price-to-book ratio is at its highest since 2009.