CNBC didn't get the story right when they reported India's elections caused the Sensex to roar because 1> free market reforms would accelerate with the winning congress party and 2> commies got salughtered. The real significance of India's result to the markets can be said in ONE word. The word is MANDATE! Yes, the ruling congress party got the MANDATE to do as it pleases and streer the course of the economy and the country in a way that it sees fit. Previously, the same congress party was in power but its power was greatly hampered because it had to work with several cranky coaltion partners most of who were socialists, communists and regionally biased parties. So to get anything done it took an act of God as endless debates and bickering led to year long stalemate. Now the congress is so close to the majority that it can easily get the additional support it needs without paying the price it did before. And that changes everything. For years now India has made dramatic progress with a unwieldy coalition government and for the first time in years we have a reform-minded party with a clear mandate to govern. Naturally the economy now gets a significant lift even if all that the congress party did was to maintain staus quo. And thus the 18% lift in the markets in one session.
Another big reason that the markets liked the congress victory was that the congress party was seen as a religiously secular party that believed in a secular nation as compared to its opposition the lead party of which was seen as a Hindu nationalist party. Any time you mix religion and politics it is hell for the economy and having the religious party defeated boosted confidence in the markets.
The 18% rise therefore is not irrational exuberance it is rather a correct recognition of the boost given to the economy by this huge mandate. I expect India stocks to continue rising beyond the first 18% registered on the immediate aftermath of the congress victory.
And lastly I believe that the Indian market uplift boosted the U.S. market rally which was already fueled by Lowe's better-than-expected results. The reason is that we now have one more huge billion peope plus market opening up further creating additional consumer and business demand. This is good for all export oriented U.S. companies specially IBM, HP, Caterpillar who do a lot of business in India.