Market analysts react as votes are counted in India's giant election

BENGALURU (Reuters) -Indian Prime Minister Narendra Modi's alliance was heading towards a majority in vote counting trends in the general election on Tuesday, but the numbers so far showed the margin of victory may not be as large as exit polls suggested, leading to a rout across markets.

MARKET REACTION:

STOCKS: Indian shares posted their worst session in more than four years, with the Nifty index closing 5.7% lower.

RUPEE: The Indian rupee weakened 0.47% versus the U.S. dollar, and was quoted at 83.53 per dollar.

BONDS: India's benchmark 10-year bond was quoted at 100.40 rupees, with the yield up 10 bps at 7.0411%, after hitting their highest in nearly two weeks earlier.

Here are some top reactions from market analysts:

KEN PENG, HEAD OF INVESTMENT STRATEGY, ASIA, CITI GLOBAL WEALTH, SINAGPORE

"The key question is whether BJP can retain single party majority. If not, then would its coalition be able to deliver economic development, particularly infrastructure?"

"The Indian equity market had essentially been flat for three months ahead of this election and this new political uncertainty is likely to cause some moderate de-rating for Indian equities for several reasons."

"There may be more expansionary fiscal policy to strengthen welfare and other local government spending... past episodes of fiscal slippage had been associated with weaker equity and currency."

NEELESH SURANA, CHIEF INVESTMENT OFFICER, MIRAE ASSET MUTUAL FUND

"The current market reaction is largely stemming from unmet expectations. This overreaction reflects a sense of disbelief."

"However, despite the verdict, there will likely be underlying continuity in government policies. Stocks in sectors within industrial, capital goods, and government companies, which surged too rapidly during the last one year, were ripe for correction given that many companies saw their stock prices outpace earnings growth."

"There has been a frenzy of activity in the market over the past two days. Individual investors, buoyed by the perception of a one-way ascent in stock prices, exacerbated market fluctuations through derivatives trading. Corrections do get amplified in such situations as derivatives positions tend to magnify market movements in either direction."

NICK FERRES, CHIEF INVESTMENT OFFICER, VANTAGE POINT ASSET MANAGEMENT, SINGAPORE

"Although the Modi government will likely be returned, the slimmer majority has raised some concern about continuity of the policy agenda and macro stability. To be clear, we are not bearish on the market but the price you pay matters for your future return. The way price has responded to news suggests that a lot of hope in future growth had been priced."

JOHNNY CHEN, PORTFOLIO MANAGER, EMERGING MARKETS DEBT WILLIAM BLAIR, SINGAPORE

"While the markets will likely price out election uncertainty, they could swiftly redirect their attention to the government's 2025 budget in July and ongoing reforms, including long-term fiscal consolidation plans, land and labor laws changes, and measures to attract foreign investment inflows with Indian government bonds entering the GBI index later this month."

MANISH BHARGAVA, FUND MANAGER AT STRAITS INVESTMENT MANAGEMENT, SINGAPORE

"Foreign investors are closely monitoring the election outcome. A stable government encourages foreign inflows, while uncertainty can trigger outflows."

"In the absence of a decisive win for the ruling party, we may witness a reversal of recent gains in the Indian equity markets, and the Indian rupee is also likely to weaken further. Additionally, uncertainty surrounding a convincing BJP victory could lead to a spike in bond yields, causing volatility as market participants will reassess the political landscape."

DIPAN MEHTA, FOUNDER DIRECTOR AT ELIXIR EQUITIES, MUMBAI

"The biggest disappointment for the market is the fact that Bharatiya Janata Party (BJP) does not have a majority (yet). I don't need to say more, but that opens up Pandora's box because all the other players ... are all quite volatile."

VASU MENON, MANAGING DIRECTOR OF INVESTMENT STRATEGY, OCBC, SINGAPORE

"A narrower-than-expected victory for Modi's alliance may raise doubts about the new government's ability to push through politically difficult reforms seen as crucial to sustain India's economic growth, which is already the world's fastest."

"Despite this the fact remains that the BJP-led alliance is still set to win a third term, which means continuity in the government's infrastructure and manufacturing-led drive to boost economic growth."

(Reporting by Bharath Rajeswaran, Jayshree Upadhyaya and Siddhi Nayak in Mumbai, Bansari Mayur Kamdar in Bangalore, Tom Westbrook Ankur Banerjee in Singapore; Compiled by Indranil Sarkar in Bengaluru; Editing by Savio D'Souza, Nivedita Bhattacharjee and Janane Venkatraman)