Traders shun hedges before vote on confidence in Modi win

Investors are so confident that Prime Minister Narendra Modi's party will win a key state election that they are feeling little need to hedge against another outcome.

The NSE Nifty 50 Index has rallied to within a whisker of its life-time high amid the lowest price swings in about six months, as data showed Asia's third-largest economy is recovering from Modi's shock cash ban. The cost of bearish options tied to the gauge relative to bullish wagers is the lowest since October, signaling muted demand for protection against losses.

"Investors are not hedging the downside risk as they don't expect anything negative from the elections," Sanjiv Bhasin, executive vice president at Mumbai-based India Infoline, said by phone. "There's optimism that the Bharatiya Janata Party will win Uttar Pradesh state polls. We're advising clients to avoid going short on the market."

A strong showing in the key electorate state of 200 million people will help the BJP boost its position in the parliament's upper house, where some of its reform efforts have stalled, and bolster Modi's prospects of clinching a second term in the 2019 general elections. Such an outcome would be a boost to an economy that still boasts one of the world's fastest growth rates, a stable currency and slowing inflation.

"Uttar Pradesh polls is a rehearsal for 2019, and success in this state will give Modi a huge fillip in public perception," Ajay Bagga, executive chairman at OPC Asset Solutions , said by phone. "Modi's government won a clear majority in 2014" after sweeping the northern state, winning 71 of its 80 lower house seats, he said. The value of Indian stocks reached $1.76 trillion on March 2, a nine-year high, as flows into local funds accelerated after demonetization damped the appeal of gold and real estate, and foreigners turned net buyers in February for the first time in five months.