Indian shares surge as Modi's allies pledge support to form government

A man glances at results for India's general elections on a screen inside the Bombay Stock Exchange (BSE) in Mumbai

By Sethuraman N R

BENGALURU (Reuters) - Indian shares jumped over 3% on Wednesday, marking its best one-day gain in over three years after key allies pledged their support to form a new government following a narrow win for Prime Minister Narendra Modi's alliance.

The NSE Nifty 50 index ended up 3.4% at 22,620.35 points and the S&P BSE Sensex rose 3.2% at 74,382.

The Nifty saw its best percentage gain since Feb 1, 2021, when union budget-related announcements drove the market up nearly 5%.

Prime Minister Modi is expected to be sworn-in for a rare third term on June 8, after the Telugu Desam Party and Janata Dal (United) pledged their continued support a day after a humbling election verdict saw his Bharatiya Janata Party lose its majority in parliament.

The benchmark indexes closed nearly 6% lower on Tuesday, recording its worst session since March 2020.

"The support pledged by the allies has given confidence to the market as there were uncertainties around this," said Deepak Jasani, head of retail research at HDFC Securities.

Heavyweight bank stocks surged 4.5%, while the financial services index jumped 4.2%. Both the indexes dropped nearly 8% on Tuesday.

The Nifty Volatility Index, a gauge for domestic market volatility fell to its lowest since May 27 at 18.66.

Meanwhile, foreign institutional investors (FIIs) sold a record 124.36 billion rupees (about $1.5 billion) worth of Indian shares on Tuesday, provisional data from the National Stock Exchange showed.

Neeraj Dewan, director at brokerage Quantum Securities said there may be some sectoral rotations until there was clarity around policy decisions.

Consumer goods stocks surged 4%, while auto stocks gained 4.2% on expectations of rural demand. IT stocks were up 2.4%.

Adani Ports surged 8.5% and was the top gainer in the Nifty 50 index, after falling over 21% in the previous session.

Some analysts also said a fall in Indian equities could present an opportunity to buy stocks.

"Broad policy continuity, macroeconomic resilience and strong growth fundamentals should keep relative appeal for Indian equities intact," Goldman Sachs said in a note.

"We also expect foreign flows to return, given this event risk is behind us now, especially in the light of weak flows so far this year and multi-year low foreign positioning," Goldman said.

(Reporting by Sethuraman NR in Bengaluru; Editing by Nivedita Bhattacharjee)