True surprises for markets are rare. Yesterday's rise of 17 per cent in India's benchmark Sensex stock index was an exception. It is plain that the market is very happy that the ruling Congress party won a smashing victory in parliamentary elections, which should now give it much greater freedom of political manoeuvre.
Markets like political stability, particularly for market-friendly governments, so this reaction makes sense. But the extent of the new optimism must be tested. Morgan Stanley, for example, raised its Indian earnings forecast for next year from a 10 per cent fall to a 2.5 per cent gain.
More broadly, the renewed rise of Indian stocks suggests that the world is re-embracing the thesis of “decoupling”, which posited that the larger emerging markets (particularly the Brics – Brazil, Russia, India and China) had found their own sources of internal growth and could grow even if the US and Europe went into recession.