Mumbai: Indian stocks surged by the most in nearly six years to a record after exit polls showed that the Bharatiya Janata Party (BJP)-led coalition is likely to return to power, the only time a non-Congress alliance has managed it since Atal Bihari Vajpayee returned the coalition to victory in 1999.

The BSE’s benchmark Sensex jumped 3.75%, the biggest one-day gain since 10 September 2013. The index added 1,421.90 points on Monday to close at a record 39,352.67 points.

The National Stock Exchange’s (NSE) Nifty index gained 3.69% to 11,828.25 points. BSE MidCap and BSE SmallCap indexes also rose more than 3%. Indian shares added 5.24 trillion in market value.

Exit polls suggest the incumbent National Democratic Alliance (NDA), led by Prime Minister Narendra Modi, will return to power with a clear majority. Exit poll results were released on Sunday evening after a gruelling five-week-long election that started on 11 April. The final results of the general election are due on 23 May.

For stock investors, the exit polls removed uncertainty about a hung verdict and the formation of a third front government, with no major national party at the helm, said analysts.

If the exit polls turn out right, Indian equities should stage a robust rally, according to Morgan Stanley Research.

The recent decline in markets, led by concerns pertaining to a potential trade war between the US and China and uncertainty over the outcome of general elections, does provide room for the markets to bounce back, according to analysts at Motilal Oswal Securities Ltd.

The NSE’s India VIX index, which tracks investors’ perceptions of volatility for at least a month ahead, fell 15.7% on Monday, its biggest single-day fall since 1 Feb 2017. In 2019 till 17 May, India VIX rose 48%.

However, analysts do not see a significant upside or re-rating for the markets due to fundamental concerns such as earnings downgrades.

“Assuming no material change in actual results versus the exit poll predictions, we expect the market’s focus to revert to fundamentals post the election and government formation," Motilal Oswal Securities said in a note to clients on Monday. “Progress of monsoon, trends in rural consumption and events in debt market will be key near-term monitorables."

Nomura also does not foresee a major reversal of the current (weak) economic conditions in the short term, although the end of political uncertainty and policy continuity would be a medium-term positive.

“Rural reflation, infrastructure spending, streamlining of the goods and services tax, direct tax reforms and the consolidation of public sector banks are likely to be the key priorities," Nomura said in a note to clients on Monday. “Fiscal consolidation is an objective but will be a challenge in the absence of revenue mobilization or a growth rebound."

Exit polls have not been accurate for the last three national elections.

In 2004, exit polls wrongly forecasted that the BJP-led NDA would win again, while in 2009 they sharply underestimated the seat share of the Congress-led United Progressive Alliance.

While exit polls correctly predicted that the BJP-led NDA would come to power in 2014, they significantly underestimated the margin of victory.

Markets have a tendency to extend their rally in the short-term period from exit polls to counting day.

Data shows that in 2014, Sensex rose 4.9% from exit poll to result day, while in 2009 it jumped 17.49%.

Derivative positions suggest that the markets are still edgy about the final poll outcome. Although there has been some short covering, implied volatilities remain on the higher side post the exit polls.

Overall institutional positions have been coming down. Last month, foreign portfolio investors’ net long positions were the highest in the last one year at 100,000 plus contracts. “FIIs (foreign institutional investors) liquidated in the month of May, currently drawing down to net long of only 25,000 contracts," an analyst said. “Simultaneously, DIIs (domestic institutional investors) have reduced their net shorts from approximately 45,000 contracts to only 5,000 in the last one month. This clearly depicts a trend that DIIs are coming out of the net shorts, while FIIs are liquidating their net longs."

Clifford Alvares contributed to this story.