Indian stock market party for Modi is brief as big challenges remain

Early results show a comfortable margin for Modi

By Rishi Iyengar, CNN Business
Atul Loke/Getty Images

Indian Prime Minister Narendra Modi 

(CNN) - A landslide victory for India's Prime Minister Narendra Modi briefly sent the country's stock markets to record highs as the results started to come in.

India's benchmark index, the Sensex, surged 900 points to cross 40,000 for the first time ever Thursday morning after early poll counts in the country's massive election gave Modi's party and its allies a big lead. The country's other major stock index, the Nifty, also hit record highs.

But both markets gave up their gains later to close slightly weaker. India's currency, the rupee, also surged early in the day before dropping back.

Analysts had predicted the stock market rally would be short-lived, as realities about the slowing global economy, trade disputes and tricky local issues return to preoccupy investors.

"One has to keep the uncertain global backdrop in mind and also the sluggish growth of the domestic economy," said Priyanka Kishore, India economist at Oxford Economics.

Mixed record

Modi swept to power in 2014 promising to give India's economy a shot in the arm by removing red tape and spurring domestic and foreign investment.

He's had some success in boosting India's image as an attractive investment destination for manufacturers and retailers, but other promises haven't panned out and growth and investment has slowed in recent quarters.

"The expectations of really big reforms from 2014 are a bit tempered now, but I think we'll see a broadly reform-minded and business-friendly government," said Shilan Shah, India economist at Capital Economics.

Though only a handful of seats have been officially called, Modi's Bharatiya Janata Party-led National Democratic Alliance (NDA), which needs 272 seats in the next parliament to form a government, had officially won 22 constituencies and was leading in 327 others by 6 p.m. local time. The main opposition Congress Party, by contrast, was only on track to win 50 seats.

Rahul Gandhi, leader of the Congress Party, conceded defeat in a speech Thursday evening.

Surprise landslide

In 2014, the BJP secured 282 seats — the biggest majority for a single party in 30 years.

Stocks had already risen earlier in the week after exit polls indicated a victory for Modi's party, but investors were still expecting it to have to form a coalition government.

"No one priced in a BJP majority," Shah said.

Modi is now poised for an even bigger majority than he had in his first term, with the BJP alone on track to win more than 300 seats.

"Together we grow. Together we prosper," Modi said on Twitter, highlighting his party's "development agenda" in a subsequent tweet.

Attention will now turn to the policy priorities of the next Modi government. The Indian economy, while still growing at relatively robust rates, faces a cocktail of issues including a continuing jobs crisis and growing distress among India's farmers. Investors will be watching to see whether key unfulfilled reforms touted by Modi in his first term will be tackled.

"When the dust settles, focus is likely to return to Modi's economic agenda and whether [he] will be able to deliver on the stalled land and labor reforms in his second term," Kishore said.

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