Indian stocks see biggest gain since September 2013; bonds, rupee rally

By Swati Bhat and Arnab Paul

MUMBAI/BENGALURU (Reuters) - Indian stocks saw their biggest single-day gain since September 2013 on Monday while the rupee and bonds rallied after exit polls showed Prime Minister Narendra Modi was set to win a second term with an even bigger mandate than in 2014.

Modi's National Democratic Alliance (NDA) was projected to win between 339 and 365 seats in the 545-member lower house of parliament when votes are counted on Thursday following a seven-phase election that ended on Sunday.

Markets had been expecting the NDA to win a second term but the margin of victory as suggested by the polls is a clear surprise and is expected to keep sentiment buoyant in the near term.

The NDA is seen to be relatively more fiscally disciplined and less populist in nature than its main rivals, which should augur well for inflationary dynamics, Madhavi Arora, economist, FX and rates at Edelweiss Securities wrote in a note.

"Some pick-up in fresh private investment may happen with policy and political certainty. But overall, policy focus should be on structural measures rather than mere policy rate cuts or looser fiscal stance," Arora said.

The NSE Nifty closed up 3.69% at 11,828.25 points while the BSE Sensex ended 3.75% higher at 39,352.67 points. This is be biggest single-day gain for both indices since Sept. 10, 2013.

Fund managers expect markets to see another 3%-4% rally in markets over the next few days depending on global cues but a further sharp upside is unlikely if the election results are in line with predictions, they said.

Markets are likely to hold in a range ahead of the vote count on Thursday with a bullish bias. The Nifty has broken the strong resistance it had seen at 11,800 levels and could now look to move towards 12,200, analysts said.

"What would help the markets sustain the momentum is factors that are fundamentally important, like decisive policy initiatives from the new government, faster land and labour reforms, and also the unfinished task of quick consolidation and re-organisation of the banking system," said Joseph Thomas, head of research at Emkay Wealth Management.

NEW MOMENTUM ON REFORMS?

India's bonds and rupee have both held in a tight range in recent weeks despite the positive underlying bias as investors stayed on the sidelines awaiting the election outcome.

Low inflation and foreign fund inflows have aided the rupee while the central bank's efforts to ensure adequate liquidity in the banking system through forex swaps and open market bond purchases have helped bonds.

"In terms of policies, we hope to see a continuation of what we saw in the first part of Modi's first term when the government implemented measures to improve the business climate, the bankruptcy code, GST, demonetisation," said Arjen van Dijkhuizen, Chief Asia economist at ABN AMRO in Amsterdam.

"The later part of his term has been more populist to appease his voter base. We now hope the momentum on reforms will accelerate," he added.

The partially convertible rupee ended at 69.7450 per dollar, after rising to 69.3550 in opening deals, at which point it was up 1.2 percent on the day. It still closed 0.7% higher versus Friday's close of 70.22.

Investors expect the rupee to hold in a 69-72 per dollar range in the medium term with global oil prices having the potential to push it lower.

Further gains in the rupee will also depend on flows into the stock markets.

The benchmark 10-year bond yield closed trading at 7.29%, down 7 basis points on the day after briefly falling to a low of 7.27%.

Though investors are happy with the idea of continuity, they feel that a lot of the work that has been done by the government to generate economic growth has not been felt. A second five-year term should give Modi the opportunity to implement those reforms and deliver on growth.

"I would expect more over the next five years," said David Cornell, chief investment officer at Ocean Dial Asset Management.

"A lot has been done but a lot more needs to happen in terms of the judiciary, generating employment growth, public sector divestment, attracting foreign investment, improving the fiscal deficit. So there is an awful lot more that needs to be done."

(Editing by Richard Borsuk and Jacqueline Wong)