Stocks Rebound as Potential Coalition Outcomes Emerge

Wednesday has marked another turbulent session for Indian assets, with the major equity indices partially reversing some of yesterday’s sell-off while the rupee trades on firmer footing.

• The Nifty and Sensex indices are each up around 3%, though are overall little changed on the week. Equities initially rallied at the start of the week after exit polls showed Modi’s party was likely to win the election by a comfortable margin. However, the rally more than reversed after the result proved to be tighter than the polls implied. Today’s price action was likely triggered by a key ally of Modi’s political alliance, the Telugu Desam Party, affirming its support for the formation of the next government.
• USD/INR sits moderately lower on the week, reflecting the boosted sentiment on the back of the rebound in stocks. The pair has traded on either side of the 20- and 50-day EMAs over the past few sessions, trading near the latter at typing. Topside focus remains on May’s all-time high of 83.5750, while a clear break of Monday’s low of 82.9512 could instead bolster bearish sentiment.
• Nevertheless, analysts continue to flag that RBI intervention is likely to limit USD/INR momentum in either direction. Commerzbank note that we “could see RBI step up intervention to limit excessive INR weakness on potential capital outflows”, while JP Morgan have said “near-term rates and FX impact likely to be muted by active RBI management and index inclusion related passive flows.”