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During the 2024 Indian Lok Sabha elections, exit polls projected that the alliance led by Narendra Modi’s Bharatiya Janata Party (BJP) would increase its 303 seats in the 543-member lower house and likely secure a two-thirds majority, sufficient to initiate constitutional amendments. As a result, Indian shares hit lifetime highs, the rupee gained, and bond yields dropped, buoyed by investor optimism about sustained economic growth. The broader Nifty index (.NSEI) ended up 3.25% at 23,263.90 points after touching a record high of 23,338.70 in early trading. The BSE index (.BSESN) closed up 3.39% at 76,468.78 points, just shy of its lifetime peak of 76,738.89 reached earlier. Both indices have nearly doubled in value since their close the day before the 2019 election results. The benchmark 10-year government bond yield ended at 6.9438%, its lowest closing level since April 7, 2022, down 4 basis points on the day.

However, the actual election results were less favorable than expected, with the BJP needing to rely on the NDA alliance to form a government, unsettling investors. This uncertainty led to a major market crash on June 4, the worst in four years. The NSE Nifty 50 index (.NSEI) closed down 5.93% at 21,884.5 points, and the S&P BSE Sensex (.BSESN) fell 5.74% to 72,079.05. Both indices had fallen as much as 8.5% earlier before recovering some losses. This marked their biggest intraday fall since March 2020, when stocks were severely impacted by the first COVID-19 lockdown.

On the day of the crash, only defensive fast-moving consumer goods stocks (.NIFTYFMCG) gained, rising 1.3%. Half of the eight advancing stocks on the 50-member Nifty 50 were FMCG stocks. Conversely, state-run companies (.NIFTYPSE) plunged 16.4%, and energy stocks (.NIFTYENR) sank 12.5%, both recording their worst day ever. Finance stocks (.NIFTYFIN) retreated 7.9%, infrastructure (.NIFTYINFR) dropped 10.2%, and realty (.NIFTYREAL) fell 9%, with each sector experiencing its worst session since March 2020. Adani Enterprises (ADEL.NS) and Adani Ports (APSE.NS) fell 19.3% and 21.2%, respectively, leading declines on the Nifty 50. Other Adani group stocks dropped between 10% and 19%. The high valuations, with many stocks near record highs, also contributed to the market downturn.

Despite the volatility, Morgan Stanley research predicts that India is on the cusp of a decade of unprecedented growth, potentially surpassing Japan and Germany to become the world’s third-largest economy by 2027. Concurrently, its stock market is projected to rank third globally by the end of this decade. Market confidence in India’s growth prospects has driven up stock valuations, reflecting expectations of future cash flows at lower rates of return. According to Ridham Desai, Morgan Stanley’s Chief Equity Strategist for India, the market may have largely priced in growth expectations tied to leadership continuity. However, several factors, such as growing domestic investment in equities, improving social equity, and a rapidly evolving tech sector, support sustained earnings growth and a corresponding lift in share prices. Desai believes these factors could boost earnings by 20% annually for the next five years, a potential not yet fully reflected in current share prices.

India is anticipated to drive one-fifth of global growth in the coming decade. This growth is based on the country’s rising status as the world’s back office and factory, as well as a burgeoning consumer class empowered by a digital economy and a transition to green energy. Reflecting this narrative, India’s stock market has been steadily rising, marking new highs. Investor confidence in future growth and moderating volatility, especially compared with other emerging markets, is driving up the price-to-earnings ratio.