The world’s largest election has come to a close in India. Exit polls are pointing to another Modi victory and banks expect this to spark Indian markets to ride higher.

General elections in India were held from April 19 to June 1 this year with 642 million out of nearly a billion eligible voters having participated. While counting is still underway, exit polls forecast that Prime Minister Narendra Modi will secure a third term with his ruling Bharatiya Janata Party (BJP) expected to win big.

How will this impact Indian markets?

Near-Term Returns

According to a Standard Chartered note, a Modi victory that matches exit poll projections could trigger short-term gains, though this event may have limited implications beyond that. 

«India equities have historically delivered strong near-term returns if the results confirm initial estimates,» the bank said. «Any upsets could lead to a knee-jerk reaction. Strong growth outlook and corporate earnings should provide support in the event of any pullback. Election outcomes have had little long-term impact on Indian equity returns.»

Market Correlation With GDP

More important for the long-term is policy and its effect on growth. According to Carlos Casanova, senior economist, Asia at UBP, the ruling government has been able to implement reforms that have benefitted markets such as the «Make in India» strategy which encourages companies to set up local factories and incentivizes foreign investments into manufacturing.

«Besides, Modi has also published plans for India to become a 'developed nation by 2047, which will require investment into infrastructure and growth of around 8 percent per annum,» Casanova commented in a note. «Given the structure of Indian markets, we observe a strong correlation between GDP growth and [earnings per share] growth. High quality, high visibility earnings may fuel Indian equities higher in the months ahead.»

Structural Tailwinds

Policy aside, India also has structural tailwinds that are positive for the economy for years to come. One of the most notable factors is the rise of its population, which surpassed China for the first time in 2023 and has now reached more than 1.4 billion. 

«Population growth is an easy way to guarantee higher rates of economic growth – look at India today,» HSBC said in a note. 

«But importantly, an increase in the size of the labor force helps keep a lid on wage demands and thus underlying inflation pressures. This is a key tenet of the golden path scenario which incorporates other positive supply-side shocks such as a pickup in productivity growth, or benign geopolitics and subdued commodity prices – typically good news for markets.»