Mumbai traders began the day with surprise as India began counting votes from a seven-week election and it became clear that Narendra Modi's government was not doing as well as expected. By the end of trading Tuesday, markets had fallen 6 percent, nearly wiping out the year's gains.
India's stock market had been soaring, boosted by economic growth and confidence that Modi, the most powerful prime minister in generations, would surely secure a third term. Investors looking to India They crave political stability and many have done especially well during the first 10 years of Modi's pro-business leadership. Even after Tuesday's fall, the blue-chip Nifty 50 index has almost tripled since Modi became prime minister.
But major Indian market indices have entered choppy waters in the run-up to the elections.
Some companies, specifically those considered “Modi stocks,” fared especially poorly when the election result became known. The fortune of the Adani Group was always the most striking. Gautam Adani quickly became Asia's richest man as his infrastructure-oriented businesses worked in harmony with Modi's plans for the country. That is, until short seller report early 2023 accused the Adani Group of market manipulation and accounting fraud.
Adani's shares plummeted, but within a year, when it became clear that the Indian government and many of the world's largest banks would be patient with the companies, they rose again. On Tuesday, Adani Enterprises, the group's flagship company, lost 19 percent of its value, putting it halfway between its peak and subsequent low.
Still, Modi won enough seats to form a new government, albeit with a much smaller majority than anticipated. Chris Wood, global head of equity strategy at Jefferies, an investment bank, last year got an even worse result for Modi, saying during an investor summit in October that if Modi were suddenly defeated, "I would expect a 25 percent correction, if not more".
Some degree of correction might be welcome, at least among professional investors. Much of the market's recent growth has reflected the influx of small local investors buying shares for the first time.
As global investors clamored for access to India's long-term prospects, it had become almost impossible to find bargains. Christine Phillpotts, emerging markets portfolio manager at Ariel Investments in Chicago, said India had become "the market that everyone loves to love." That meant there weren't many opportunities left, although she agreed that India's economy would continue to grow strongly.
The other consolation is that, as much as investors need to know which government policies will favor which companies, India's track record suggests that its economy is capable of growing rapidly under conditions of vigorous multiparty democracy. Some of the fastest rates ever recorded were achieved under a previous coalition government, during a period of accelerated growth between 2006 and 2010.
Even Wood, who anticipated a market decline in response to Modi's loss of ground, thought stocks would “rebound sharply, given the momentum” in the Indian economy as a whole.
