Published May 19, 2009

Polls launch Indian stocks into orbit

Sensex jumps 17% in a day on promise of reforms; rupee climbs, return of overseas investors

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(MUMBAI) Freed from the deadweight of political uncertainty, India's stock market took wing yesterday and soared more than 17 per cent before a trading halt kicked in.

The rupee jumped the most in two decades and bonds rose after a convincing victory for the Congress Party dispelled fears of an unwieldy coalition. Already, there is talk of sweeping economic reforms, more foreign direct investment and a new landscape for the banking, retail and insurance sectors - all music to the stock market's ears.

Less than a minute after opening yesterday, the benchmark Sensex jumped 1,305.97 points, or 10.7 per cent, to 13,479.39, triggering a two-hour pause in trading. Within seconds of trade resuming, it was 17.2 per cent higher at 14,272.63, triggering the shutdown.

The stock index may surge as much as 20 per cent over the next week as international investors pick up more Indian shares, said Singapore-based Samir Arora, who oversees Helios Capital Management, an India-focused hedge fund. He sees US$3 billion pouring into the stock market from abroad within a month.

The rupee rallied the most since March 1986 against the US dollar, gaining 3.3 per cent to 47.78. Madhusudhan Kela, head of equities at Reliance Capital Asset Management, the country's largest money manager, predicted that the Indian currency will gain 15 per cent by the end of next year.

After month-long elections that ended last weekend, the Congress Party alliance unexpectedly captured 261 seats in India's 543-seat Parliament - one of the most crushing electoral victories in nearly two decades of fractious coalition politics.

The near collapse of India's once powerful communist parties - which lost more than half their parliamentary seats - paves the way for long-awaited reforms in insurance, pension funds, banking and retailing. The Congress government may also sell some of its stakes in state-run oil, banking and fertilizer companies.

Reformists are expected to bag key Cabinet positions and among the names mentioned for the post of finance minister were Montek Singh Ahluwalia, deputy chairman of the Planning Commission and Foreign Minister Pranab Mukherjee.

The victory raised hopes of a revival in foreign direct investment (FDI) and economic growth.

'FDI would have to be welcomed into India, like every other developing country,' P Chidambaram, former finance minister and now Home Minister, told reporters. 'But FDI in a regulated manner,' he added.

India received about US$38 billion of foreign direct investment last year - about a fifth of the flows that went to neighbouring China.

Many now expect the pace to pick up. 'This is an absolute game changer,' said William Nobrega, co-author of Riding The Indian Tiger.

Congress and its allies won 261 of the 543 elected Lower House seats, with the party getting 206 lawmakers of its own - 61 more than in 2004 and almost twice as many as the opposition Bharatiya Janata Party (BJP).

The main communist party, Dr Singh's partner in the last administration, won only 16 seats, far less than the 43 it gained in the last election. The communists, who resisted increased foreign ownership of insurers and any outside investment in retailing, tried to bring down the government last July over a civil nuclear energy accord with the United States.

Wal-Mart Stores Inc and Prudential Plc are among global companies that stand to gain a stronger foothold in India now that the government can function with fewer coalition partners.

'There were so many major initiatives that were sidelined,' Mr Nobrega said. 'It will have a phenomenal boost on the Indian economy this year and next.'

Angel Broking managing director Dinesh Thakkar said investors, many of whom had been sitting on cash, welcomed the end to uncertainty.

'We will see lots of reforms and spending on infrastructure,' said Mr Thakkar, who predicts a long bull run for the market. 'Now that there is no event risk and there is a strong government, we will catch up (with other markets),' he added.

In their euphoria, Indian traders shrugged off news of weak company earnings from the region, which dragged other Asian markets down yesterday.

Japan's Nikkei 225 stock index lost 213.25 points, or 2.3 per cent, to 9,051.77 and Hong Kong's Hang Seng slid 212.09, or 1.3 per cent, to 16,578.61.

Despite the high sprits, even within India there are headwinds to change. Congress is unlikely to curtail costly social welfare programmes which have added to the budget deficit.

The global financial crisis has already slowed the pace of some reform, as Indian authorities look with fresh scepticism on the wisdom of US-style markets and regulation. -- AP, AFP, Bloomberg