By Don Miller
India's Prime Minister Manmohan Singh's Congress Party decisively won nationwide elections over the weekend, sending India's benchmark stock index up a record 17% and triggering circuit breakers that halted trading.
By handing Singh's Congress Party a clear victory over the opposition Communists, India's voters also may have given a boost to the Obama administration's hopes for world trade talks that have been stalled by fears of rising protectionism.
The Bombay Stock Exchange halted trading within seconds of the market's opening after shares of the Sensitive Index, or Sensex, breached a limit set by the market regulator. Two hours later trading resumed and stocks jumped further, exceeding limits determined by the Securities and Exchange Board of India, triggering an automatic shutdown for the rest of the day for the first time ever.
"Markets are euphoric," Rahul Chadha, the Hong Kong-based head of Indian equities at Mirae Asset Global Investment, with $46 billion in global equities told Bloomberg News. "The focus by federal and state governments on development will lead to a structural re- rating of India."
The election results lit a fire under Indian financial markets, boosting investment categories across the board. The rupee climbed 3% against the dollar, the biggest gains in two decades, and the benchmark bond yield fell 12 basis points as prices rose.
The Sensex increased its year-to-date gain to 48%, up from 26% on Friday. It moved ahead of Brazil, Russia and China among the BRIC countries, and the index now stands second only to Peru among global benchmarks. The Indian market now trades at 15.6 times earnings, more than double the 7.7 price-to-earnings ratio (P/E) of November, Bloomberg data shows. That's still lower than China, at 26.8 times, or Brazil.
Morgan Stanley (NYSE: MS) raised Indian stocks to "overweight" from "underweight," and said its model had never before recommended overweighting India. The brokerage boosted its forecast for economic growth next year to 5.8%, from 4.4%.
"The election result is extremely positive and very, very bullish," Madhusudan Kela, head of equities at Mumbai-based Reliance Capital Asset Management, the nation's largest money manager overseeing $18 billion of assets, told Bloomberg. "This will provide a government which is stable and has powers to take decisions."
Singh's party won the most seats since 1991, when the government rejected Soviet-style state planning and instituted free-market reforms that helped India's economy quadruple in size.
Now that the Congress Party holds almost twice as many seats as the communists, Singh may further reduce barriers to foreign investment in insurers and retailers, reforms that had been held back by communist lawmakers.
The decisive victory may have also created a chance to break a deadlock in negotiations on global trade that were hampered last year by a U.S.-Indian dispute over farm trade, as it coincides with signs that U.S. President Barack Obama's administration is moving towards finalizing a World Trade Organization (WTO) accord.
On a visit to Geneva last week, U.S. Trade Representative Ron Kirk said Washington was committed to the success of the 2001 Doha trade agreements and wanted to preserve progress already made instead of starting over from scratch.
Kirk repeated that any trade agreement is contingent on major emerging economies, including China, India and Brazil opening up their markets to more American exports. Moving a WTO bill through a trade-wary Democratic Congress will be difficult without clear benefits for U.S. businesses.
Although the Obama administration has not set a date for concluding a U.S. trade policy review, some analysts see the results of the Indian election as a chance to advance global trade that can't be wasted.
"Washington should not squander the opportunity for an early understanding with a more market-friendly Indian government," trade expert Paul Taylor wrote in a column for Reuters.
Protecting developing nations like China and India from a surge of agricultural imports and U.S. government subsidies to the cotton industry are the biggest remaining obstacles to a WTO agreement, Taylor wrote.
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India poll should boost world trade