After 930 million people went to polling stations across seven phases spanning six weeks, the Indian general election results are in and Prime Minister Narendra Modi has won a second term in office.

Bharatiya Janata Party (BJP) has increased its majority and secured another five years in power – the first time since 1971 that a majority government has returned to a second term with a majority.

Kaustubh Belapurkar, Morningstar fund research analyst in India says the election of a stable government result is a huge positive for markets.

"The government can now make good on their policy reform agenda, they can really push some good bills through and really get India back to their economic growth path," he says.

"We've seen some major reforms that Modi took in his first term and they are yet to play out. And in fact, it did effect a little bit of a tepid growth for the Indian economy. So, that needs to kind of now really bloom up completely and take the full course."

Market reaction

The BSE Sensex, the Indian stock market, surged in early trading on Thursday as vote counting began, and Modi looked set for success. It reached an intraday high of 40,100 before falling back to end the day down 0.76 per cent at 38,811.

The rupee appreciated 0.30 per cent against the U.S. dollar over the election week, closing at INR 69.95/USD.

Morningstar India analysts expect a stable government at the center to encourage Foreign Portfolio Investors inflows into Indian markets.

The market has been jittery in recent weeks amid fears of an uncertain outcome and a coalition government. Investors had been concerned that such a result could have seen the structural reform agenda that has been put in place grind to a halt.

Fresh mandate for economic reform

Kristy Fong, manager of the Aberdeen New India investment trust, says the result bodes well for housing and transport infrastructure, as well as the cement and real estate industries. She says: “[This] political continuity only reinforces our positive views on India, whose growth prospects are underpinned by a young population and expanding middle class.”

Gaurav Sinha, asset allocation strategist at WisdomTree, thinks the landslide victory could embolden Modi to push forward with tougher reforms. Already the Prime Ministers has implemented a nationalised Goods and Service Tax and removed high-denomination bank notes from circulation in a crackdown on fraud.

India Election

Modi’s manifesto included a $1.44 trillion boost to infrastructure and $10.5 billion to be injected into the farming industry

Some of these measures have held back economic growth in the past couple of years, points out Sandeep Kothari, portfolio manager at the Fidelity India Focus fund. “But the government has now got an unprecedented opportunity to build on the base it has created to revive the economy in its second term,” he says. “The market expects that the new government will quickly address recent issues and get the economy back on the growth path.”

Vinay Agarwal, portfolio manager at First State, was more sanguine, arguing there would have had been little bearing in the long-term regardless of the result. Sukumar Rajah, senior managing director at Franklin Templeton Emerging Markets Equity adds that the result had been widely expected and therefore priced into markets, so expects the stock market reaction to be fairly limited.

Modi’s manifesto included a $1.44 trillion boost to infrastructure and $10.5 billion to be injected into the farming industry with the promise to double farmers’ incomes by 2022. There are also plans to further simply the Goods and Service Tax.

Indian stocks expensive

Despite the upbeat market sentiment, fund managers say investors in the region need to be selective. After years of stellar stock market growth, the valuations of many Indian companies look to be relatively expensive.

Rukhshad Shroff, investment manager at JPMorgan Indian Investment Trust (JII), likes high-quality companies with the potential to grow their market share over time. The trust invests in finance firm Housing Development Finance and UltraTech Cement among others.

Nick Payne, head of global emerging markets at Merian Global Investors, likes financial services firm HDFC Bank and Godrej Consumer Products, which makes personal care products such as toiletries, soap and detergent.

Morningstar India analyst's long-term valuation-driven process leaves them generally cautious as valuations look stretched across several markets. 

"Based on our valuation-driven asset allocation approach we’re currently underweight equities, particularly Indian and US equities, and overweight fixed income – vis-à-vis neutral or benchmark asset allocation defined for each of the four portfolios," they say.

Within Indian equities, they favour large caps over mid and small caps.

This article contains contributions from Emma Rapaport, reporter for Morningstar Australia.