Rupee Climbs to Four-Month High as Exit Polls Show Modi in Lead

  • Equities pare early gains ahead of election results Saturday
  • Liquidity flows to keep stock markets bouyant: IDBI Capital

Narendra Modi.

Photographer: Dhiraj Singh/Bloomberg

India’s rupee strengthened to a four-month high after most exit polls showed Prime Minister Narendra Modi’s party ahead of its rivals to win power in Uttar Pradesh. Stocks fluctuated as investors stayed cautious before results of elections in the most politically crucial state.

Four of the six polls Thursday predicted Modi’s Bharatiya Janata Party will emerge as the single largest party, though falling short of the 202 seats needed for majority. Two others, including one that correctly forecast Modi sweeping the 2014 national elections, expect a decisive victory for his party.

The rupee closed 0.2 percent higher at 66.6050 per dollar after touching 66.5550, its highest since November. The S&P BSE Sensex pared an intraday advance of 0.5 percent to end little changed, while a gauge of mid-cap stocks fell to a one-month low. The Sensex trades at 20 times one-year forward earnings, higher than its the five-year mean of 16.1.

“Even if the actual numbers come around what is predicted by exit polls, we don’t expect the enthusiasm to last beyond one or two sessions,” said Chokkalingam G, Mumbai-based managing director of Equinomics Research & Advisory Pvt. “Valuations are stretched.”

Sovereign bonds fell, with the yield on the benchmark 6.97 percent notes due September 2026 climbing five basis points to 6.90 percent.

Second Term

With a population of 204 million -- about the size of Brazil -- Uttar Pradesh sends more lawmakers than any other state to both houses of Parliament. A win will test the acceptance of Modi’s Nov. 8 decision to junk high-value currency notes from circulation in an attempt to curb corruption. A victory will help him clinch a second term in the 2019 national poll. Counting of votes will be taken up tomorrow.

A victory “will likely be viewed as an endorsement of his policies so far and this result will be seen as encouragement to him to continue on the path he has been following,” Tony Hann, a portfolio manager at Blackfriars Asset Management, said by e-mail. “I suspect we will see discussion around the likelihood of him now securing a second term.”

Should the BJP fall short of a majority, it could spur a period of political bargaining to establish a government in one of India’s poorest states. At stake for Modi is his ability to push difficult legislation such as land and labor reforms through the parliament.

Still, any declines after the election verdict will be bought into swiftly as domestic mutual funds remain flush with cash, according IDBI Capital Market Services Ltd. Local funds bought shares for seven straight months through February, as per data compiled by Bloomberg.

“Market is expensive but with other asset classes not doing well, local investors continue to pour money into equity directly or through mutual funds,” A.K. Prabhakar, Mumbai-based head of research at IDBI Capital Market Services Ltd., said by phone. “This liquidity will help drive sentiment as it is a buyer-heavy market.”

Stocks and currency markets are closed Monday for a public holiday.

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