India’s stock markets have surged to record highs this year, fueled by optimism over the upcoming general elections and Prime Minister Narendra Modi’s leadership. However, Bernstein analysts have cautioned that a market correction could be on the horizon as the elections progress.
Market participants have been factoring in a victory for Modi’s ruling Bharatiya Janata Party (BJP), which is seen as market-friendly. Under Modi’s leadership, India has become the world’s fifth-largest economy and is aiming to become the third-largest by 2027.
The benchmark Nifty 50 index has risen by 3% this year after gaining over 20% in 2023. However, the index has dipped by around 1.7% since its record closing high on April 11 due to geopolitical concerns, such as escalating tensions in the Middle East that have roiled global markets.
Bernstein analysts Venugopal Garre and Nikhil Arela note that pre-election euphoria is building up, with expectations of the ruling party coalition winning over 400 seats. However, they caution that even if the BJP repeats its historic performance of 2019, it may not be enough to sustain the market rally.
The analysts argue that markets have already factored in a strong mandate for the BJP and its coalition, with expectations of around 350 or even 400 seats. If the BJP wins 300+ seats and the broader NDA coalition obtains 350+, they believe that a market correction is inevitable.
While 300 seats or higher would mean that the ruling party retains an absolute majority in the lower house and ensures continuity of power, Bernstein analysts warn that it could still be seen as a ‘below consensus’ result and trigger a market reaction.
They conclude that such a correction could mark the end of the current market frenzy that has lasted for a full year.
