Mumbai: Most investors have priced in Prime Minister Narendra Modi winning a second term in the 2019 elections. A change in expectations through this year could derail a rally that’s almost doubled the nation’s equity values since Modi took office four years ago.

UBS Securities India Pvt. says the optimism about the government’s economic agenda has helped investors brush off weak earnings. And the expensive equity valuations underpin the market’s hopes for Modi returning with a single-party majority, analysts led by Gautam Chhaochharia wrote in a note dated 23 February.

While not trying to predict the election outcome, UBS is recommending that investors keep an eye on three dynamics to track the event.

The rupee, already Asia’s second-worst performer, could also see a jump in volatility closer to event.

“With the election still 12 months away, only one thing is clear: uncertainty (either around the timing or party agenda)," the analysts wrote. “If portfolio flows slow due to election uncertainty or the recent rise in US inflation (and yield), then the rupee could come under pressure." Bloomberg