MUMBAI -- India's benchmark S&P BSE Sensex index touched a record high Thursday on news of Prime Minister Narendra Modi securing a second term, only to give up its gains and close on a decline.
The index surged 1,000 points to cross the 40,000 barrier for the first time, before losing steam and ending the session down nearly 300 points.
The National Stock Exchange's Nifty 50 index also hit an all-time high, around 12,000, before ending the day 80 points lower than Wednesday's close.
IndusInd Bank, Yes Bank, ICICI Bank, automakers Maruti Suzuki and Hero MotoCorp, mobile carrier Bharti Airtel and construction group Larsen & Toubro were among gainers on the Sensex, while companies such as Vedanta, ITC, HDFC Bank and Tata Motors closed lower.
The stock market had rallied since Monday, taking its cue from exit polls that predicted a clear majority for Modi's Bharatiya Janata Party. After Modi's victory was made official, the market began looking at the challenges the prime minister will face in his second term.
"Broadly, it is profit booking, and the number of speculators that had entered the market weren't expecting the market to go up any further," said Avinash Gorakshakar of Joindre Capital Services. "If you see valuations are not cheap at all, market reality will start kicking in. Corporates are saying that demand is low."
Elara Capital economist Garima Kapoor also sees difficulty ahead: a consumption slowdown, a liquidity crisis in the nonbank financial sector and lower prices for farmers. In this light, optimism around India's economic growth has come to a grinding halt.
"With limited fiscal space amid compelling priorities and electoral promises, the Modi government's second term in office is likely to be more challenging than the first," Kapoor said. "Unlike the first five years, the solution to the problems is complex and requires a radical shift in the economic policy. Among immediate priorities, we expect the government to take measures to revive consumption, address financial sector dislocation by recapitalizing public sector banks, boost the manufacturing sector to ensure job creation and solve the conundrum of skill shortage in the country."
Modi is looking at a second five-year term after the election involving 900 million potential voters.
Modi swept to power on a business-friendly platform five years ago. Since then, the growth rate has been relatively strong, currently around 7%. Experts expect the government to continue Modi's signature economic policies such as maintaining the Goods and Services Tax, clearing bank balance sheets of bad loans and solidifying the insolvency and bankruptcy code.
According to Sameet Chavan, chief analyst at financial services company Angel Broking, the stock market has rallied from lows in March on expectations that Modi's party would hold onto power.
During Modi's first term, it took about four years for the 30-company BSE Sensex index to add 10,000 points after touching 30,000 in March 2015.
Among the 30 companies, Bajaj Finance rose sharply despite the ongoing crisis in the shadow banking space during the four years. According to local brokerage Share Khan, the company has a diversified loan book, mixing consumer (40% of assets), rural (8%), SME (13%), commercial (11%) and mortgage (28%) as of December. The consumer and rural loans have contributed to the company's growth.
Another big gainer has been billionaire Mukesh Ambani's conglomerate Reliance Industries. The company has been aggressively building its consumer-business portfolio in areas such as retail and telecommunications over the past three to four years. Investors have largely approved of its strategy of gaining market share by allowing mobile telecom unit Reliance Jio Infocomm to offer consumers deep discounts.
In the latest quarter to March, the group's retail business revenue grew more than 51% on the year to 366.6 billion rupees ($5.25 billion), largely due to aggressive store expansion, value proposition and focus on customer experience, according to Nalanda Securities.
In contrast, automaker Tata Motors -- a key component of the Tata Group -- for some years has counted on its acquisition of Jaguar Land Rover until the British company began struggling with tighter emissions standards and Britain's planned exit from the European Union. Jaguar's sales in China also have slowed, owing to the U.S.-Sino trade war and the overall economic slowdown in the country.
In the March quarter, Tata Motors reported a profit of 11.17 billion rupees ($160.3 million), down 47.41% on the year. This followed three straight quarters of losses. According to Arihant Capital, demand for Tata Motors cars is likely to remain muted due to geopolitical, economic, financial and regulatory factors.