The market's confidence in India's Modi government remains unwavering, even without winning the pre-advertised 400-seat glorious victory in the general election.

The month after the election ended, the Indian stock market continued to reach new highs, and the blue chip index Nifty has accumulated a cumulative increase of more than 10% over 50 months. Wall Street's bullishness couldn't keep up with the rise in the Indian stock market. At the end of last month, Bank of America analyst Amish Shan predicted that by the end of this year, the Nifty 50 Index could break through the 24,000 mark, but as soon as he finished his prediction, Nifty 50 continued to rise sharply, reaching 24,000 points just three days later.

On Wednesday, the Indian stock market continued to soar, and the banking and finance sector surged higher. The BSE Sensex Index broke through 80,000 points in the intraday period, and the Nifty 50 Index rose 0.67% to close at 24,286.5 points.

Looking at emerging markets as a whole, the Indian stock market has almost no rivals — in the past ten miles, the MSCI India Index has been rising for 9 years. Even in 2020-2023, which was hit by the pandemic, the MSCI India Index surged 46%, leading the major emerging markets.

Considering the large-scale capital inflows brought about by the future rebalancing of the MSCI Emerging Markets Index, as well as Indian Prime Minister Narendra Modi's massive infrastructure plans and strategies to boost consumption, Wall Street is still firmly optimistic about the performance of the Indian stock market with a market value of 5 trillion US dollars. The MSCI India Index is expected to rise by as much as 20% this year. High valuations do not seem to constitute resistance to the rise; the new high is just a previous high.

Capital side: The MSCI Emerging Markets Index has been rebalanced, and India's weight is expected to increase dramatically, leading to large inflows of foreign capital

From a financial perspective, as the MSCI Emerging Markets Index increases the weight of Indian stocks, a large influx of foreign capital can bring incremental capital to the market, and the Indian stock market is expected to continue to advance rapidly.

Since November 2020, the weight of the Indian stock market in the MSCI Emerging Markets Index has almost doubled, reaching a record high of 19%. Asset management agency Nuvama predicts that the weight of the Indian stock market in the MSCI Emerging Markets Index will continue to rise. In the second half of 2024, the weight of the Indian stock market may exceed 20%.

The capital tracking the MSCI Emerging Markets Index exceeds 1.6 trillion US dollars, and the weight of the Indian stock market has increased, which means that investors tracking this index must increase their exposure to the Indian stock market accordingly and maintain the same allocation as the MSCI Emerging Markets Index. For the Indian stock market, this represents a steady inflow of capital from foreign investors.

Take HDFC Bank, which led the Indian stock market to surge on Wednesday. It is India's fourth largest private bank. Nuvama indicated in a report released this week that its weight in the MSCI Emerging Markets Index could rise sharply from 3.8% to 7.2%-7.5%, bringing in a potential inflow of 3.2 billion to 4 billion US dollars.

Fundamentals: Corporate profit expectations under strong stimulus from Modi government

On the other hand, from a fundamental perspective, with the help of strong economic growth and the continuity of Modi's government policies, Indian companies' corporate profits are expected to rise by double digits this year, continuing to catalyze an upward trend in the stock market.

This month, the Modi government will submit a federal budget bill. According to media reports, many market participants expect that the Modi administration's priority will be to adopt various incentives to support consumption. Major policies in the budget include lowering tax rates for specific categories of individuals to boost consumer confidence, increase middle class savings, and continue to promote capital spending on infrastructure.

In the 2023-24 fiscal year, India's GDP growth rate reached 8.2%, far exceeding the global average, but the consumption growth rate was less than half of the economic growth rate.

Modi previously stated during the formation of the new government that it will work to increase the savings of the middle class and improve their quality of life. To implement this goal, the Indian government may revise the 2020 tax plan to give the middle class greater individual tax relief. According to India's current tax plan, the individual tax rate for groups with an annual income of no more than 1.5 million rupees (130,000 yuan) is 5% to 20%, while the individual tax rate for groups with income over 1.5 million rupees is as high as 30%.

In addition, the early Indian monsoon boosted the prospects of crop-related companies such as rice, corn, and soybeans. According to Wall Street analysts' opinions compiled by the media, MSCI India Index's earnings per share for the full year 2024 will increase 15.6% year-on-year. Among all industries, non-essential consumption is the most promising. This is followed by the financial and commodities sector.

Promoting capital spending will also be Modi's government's top priority.

Investment bank Jefferies said in a report released at the end of last month that the Bank of India's generous dividends to the government, as well as increasing taxes, can support the Indian government to “please everyone with higher capital expenditure, social spending, and tighter finance.” In the 2024-25 fiscal year, India's federal budget plans to limit the fiscal deficit to 5.1% of GDP.

Bino Pathiparampil, head of research at asset management agency Elara Capital, told the media: “Supported by rising profit margins, Indian corporate profits have been strong in the past year, and growth in fiscal year 2025 may be higher than the historical average, thus continuing India's growth story.”

However, it should be noted that although India has certain advantages in terms of population structure, policies, etc., challenges such as India's weak infrastructure construction and perennial commodity trade deficits are not problems that can be solved in a short period of time; potential headwinds may cause India's stock market valuation to decline in the short term.