After Elections, India Stocks Soar 17%

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Rajanish Kakade / AP

Onlookers react as they watch the display at the Bombay Stock Exchange building in Mumbai on May 18, 2009

India's benchmark stock index on Monday surged a stunning 17%, a record one-day gain powered by investor euphoria over a resounding victory in nationwide elections by Prime Minister Manmohan Singh's Congress Party.

Less than a minute after the market opened, share trading was halted for the first time ever when sharp gains in the Sensitive Index, or Sensex, triggered an automatic suspension. Trading resumed two hours later but so-called "circuit breakers" were again tripped by heavy buying in a matter of seconds, and markets were shut down for the rest of the day. The Sensex closed up 2,099 points at 14,272. India's Nifty index was also closed after gains of more than 15%. (Read about the key players to emerge from India's elections.)

Market analysts attributed the brief but historic run to expectations among investors that the Congress Party's victory would bring political stability to India and give Singh's progressive administration a freer hand to pursue economic reforms in sectors such as insurance, retail and banking. Some analysts are already revising India's GDP growth and corporate earnings outlooks. Chetan Ahya, economist for Morgan Stanley Asia, upgraded his growth forecast for India this year from 4.4% to 5.8%. "The markets are enthused by the current political developments after 18 years of coalition governments," says Bharat Iyer, head of India research at JP Morgan.

After losing 52.5% in 2008, the Sensex has recently been rebounding and is now up 76% since March 9 after today's gain. Institutional investors, who pulled $13 billion out of India last year, are piling back in and drove almost all of the trading on Monday, analysts say. The jury is still out on whether retail investors, who have been sitting on cash for the past 18 months, will now make a beeline for the markets. "I'd prefer them to sit by the sidelines for a while as the rally has been so fast and furious," says Shankar Sharma, chairman of Mumbai-based First Global Securities. (Read about the five challenges facing India's election victors.)

Some market observers say they expect the rally will fizzle soon because the global economy remains in the deepest recession in decades. "It's difficult for India to live in splendid isolation while the rest of the world suffers serious economic damage," says Sanjoy Bhattacharya, a partner at Fortuna Capital, an offshore hedge fund. Tough challenges remain for India's economy, too, notes Sharma. "Just because there's been a good weekend doesn't mean you can forget all our problems of fiscal deficit and lack of infrastructure growth," he says.

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