Japanese brokerage Nomura has said a Narendra Modi-led government will help the rupee jump to 58 against the US dollar and trigger up to a 10 per cent rally in the stock market.
The report titled 'India's defining moment' is authored by Nomura India chief economist Sonal Varma and her team and the brokerage's global political analysts Alastair Newton and Craig Chan.
It describes the ongoing elections as "the most important in many years" for financial markets, and "a make-or-break event for the nation's medium-term prospects".
Blaming the "imprudent" fiscal policy and a lack of supply-side reforms, the report notes that animal spirits are low and the economy is stuck in a stagflation-type situation.
"Hence, the outcomes of these elections are important," it said, as a stable government focused on economic reforms could reinvigorate the dormant animal spirits, ease business uncertainty and address the supply bottlenecks.
A clear mandate can swing investor sentiment significantly as prospects of higher productivity and a revival of the investment cycle boost potential growth, ease supply-side constraints and make room for rate cuts, which may further boost investments.
But, it said that "if the election results in a hotchpotch coalition or a third front, it would diminish prospects of structural reforms to revive potential growth and could risk significant capital outflows and monetary policy tightening even further.
"Hence, we see the forthcoming elections as a make-or- break event for the medium-term prospects".
The Modi-effect can prop the rupee to 58 to the dollar and GDP to 6 per cent in 2015, says the report, adding that it will have only a little impact on growth this year as it sees the economic expansion to be just 5 per cent.
On the impact on the economy, the report, however, sees a medium-term positive spin.
"It can help "accelerate economic reforms and coupled with continued prudent monetary policy, set the stage for a steady improvement in the nation's macroeconomic fundamentals ...in turn will take GDP to 6 per cent in 2015."