Equity markets and Indian rupee are expected to start trading with a huge gap tomorrow, financial services provider Edelweiss Securities said in a report today.
"Equity markets are likely to open with a big gap up on Monday, as desperation to deploy excess cash (both by DIIs and FIIs) will be high," Edelweiss said after the election results.
With the UPA regaining power without the Left's support, it expects the alliance to continue its policies with more power.
While foreign institutional investors may go for large caps, mid caps may interest domestic institutional investors, Edelweiss analysts Nischal Maheshwari and Siddhartha Sanyal said.
India underperformed other emerging markets year-to-date due to election concerns, but now the stable government and strong global liquidity may drive India's performance hereon.
Edelweiss expects the 50-share National Stock Exchange’s Nifty to rise by about 15 per cent in the short run. "We expect Nifty to rally to about 4,200 level in the near-term," they said.
The analysts further expect that the Indian rupee to appreciate "as India’s sovereign risk diminishes with political stability". It also added that "continued FII inflows will also push" the local currency up.
While markets in the medium to long term will remain linked largely to global liquidity and economic recovery, bond market is likely to rally in the near-term, Edelweiss said.
"FDI inflows into the country over the next 6-12 months can improve as India gets to play a larger role in G20 and the stability of the India model is better appreciated," it said.
Edelweiss expects economic reforms to speed up and the UPA to focus on fulfilling promises it had made in the past regarding reforms in the banking and insurance sectors.
Citing no key state election over the next two years, except Maharashtra, it said the UPA gets additional freedom to tighten tax reforms, infrastructure, investments among others.
The only major concern, apart from global recovery, that remains is the fiscal deficit. And, due to deficit and the UPA government's ability to take tough stance, tax reliefs may not come.
"Fiscal deficit in the medium-term is likely to remain a concern. Likely large supply of government papers over the next 3-6 months will also put a cap on the market," it said.
The report further said, "Consumption sectors may not get further boost over the next 1-2 years, as we do not expect any major tax reliefs from the government."
