Shares in India posted their best weekly gain in six weeks, rebounding from a two-week correction after a bull run, but investors will be on tenterhooks as a key state goes to the polls to elect lawmakers to the local assembly.

The two-phased voting in Gujarat, where Prime Minister Narendra Modi cut his political teeth, began on Saturday and results are due on December 18. The Bharatiya Janata Party (BJP), which has been in power for more than two decades in the western state that is famous for its trading traditions, faces its biggest challenge.

Two policy decisions by New Delhi, the removal of high-value bank notes comprising 86 per cent of the currency in circulation in November 2016 and teething problems with the launch of Goods and Services Tax (GST) in July this year, have not gone down well with the business community in the state.

“As voting begins in Gujarat, only one thing seems certain,” the Indian Express wrote in an editorial on Saturday. “The choice of its electorate will resonate beyond the state.”

BJP win seen

Pollsters are predicting the BJP to romp home with a reduced majority than it expects. However, opinion polls have often been off the mark and a wafer-thin win or defeat for BJP could rejuvenate the opposition Congress party for the national elections due in 2019 and puncture the bullish fervour among investors.

“Market assumptions so far have been of a comfortable BJP victory in Gujarat, and that the momentum continues till 2019,” Credit Suisse analysts Neelkanth Mishra and Prateek Singh wrote in a note.

Doubtlessly, these expectations lifted the top-30 Sensex 1.3 per cent over the week to 33,250.30, its biggest gain since early November. The broader 50-share Nifty climbed 1.4 per cent to 10,265.65, posting its best rise since late October.

There could also be repercussions for the Indian currency if ‘Modi fatigue’ shows up in the election results. “The rupee will also move lower with Indian equities if investors start fretting about how small the margin of victory will be for Modi and the BJP,” analysts at DBS Bank wrote in report.

The rupee closed at 64.46 against the dollar on Friday, up 5.3 per cent this year. Foreign flows of $8.36 billion into equity and $22.92 billion into debt this year have underpinned the rupee.

Growth picking up

The good news is expected to come from the economy, where a slew of reforms have set the stage for a sustained rebound. After an unexpected sharp slowdown to 5.7 per cent in April-June, the $2.3 trillion (Dh8.45 trillion) economy grew 6.3 per cent in the September quarter and the momentum is tipped to gather strength on the back of recapitalisation of banks and steps to plug loopholes in bankruptcy rules.

Corporate-return expectations and balance sheet fundamentals are improving, and a strengthening financial system should be able to revive investment credit demand, Morgan Stanley said.

“This sets the stage for a full-fledged recovery in 2018, and we expect real GDP growth to accelerate from 6.4 per cent in 2017 to 7.5 per cent in 2018 and further to 7.7 per cent in 2019,” analysts at the US securities house said in a research note.

Emerging markets guru Mark Mobius, who runs big funds at Franklin Templeton, believes India’s growth could reach 10 per cent if the government aggressively pursues programmes such as privatisation of railways, power, roads, bridges and so on. “It will mobilise capital at a faster pace than we are seeing now,” he told ET Now television channel.

“I think a lot of the impact of the urbanisation of the economy will push this number forward,” he added, referring to the economic growth rate. “You are going to see the accelerating trend and we are already beginning to see that as a result of the reforms that have taken place.”

Shares in Maruti Suzuki, the country’s biggest carmaker, sped to an all-time high of Rs9,119.95 (Dh519.07) and closed at Rs9,040.85, making the company the sixth most valuable at Rs2.73 trillion at the BSE, ahead of State Bank of India. The stock has jumped 70 per cent this year, well ahead of the 25 per cent rise each in the benchmark Sensex and the BSE Auto index, riding robust sales growth.

Brokerage picks

Shares in food maker and distributor Future Consumer Ltd jumped almost 16 per cent on Friday after Morgan Stanley recommended investors to go “overweight” on the stock, saying scale-driven efficiencies, better fixed-cost absorption and product mix improvement would likely help the company’s operating margins to expand by 470 basis points by March 2020.

The US securities house set a price target of Rs95, a 40 per cent potential rise from Friday’s close of Rs67.95. The stock has more than tripled so far in 2017, compared with a 27 per cent rise in the benchmark BSE FMCG index.

The brokerage expects company to emerge as the country’s fifth-largest fast-moving consumer goods (FMCG) company by March 2021.

“We think of Future Consumer as a start-up, building its business on the FMCG 2.0 platform — launching innovative products in emerging categories, leveraging digital assets, and focusing on consumer acquisition closer to the point of sale,” it said in a research note.

HSBC believes favourable government policies, consolidation in the industry and fuel-efficient fleets offsetting higher fuel prices have brightened the prospects for the aviation sector, with the outlook more upbeat for low-cost carriers than full-service airlines.

Initiating coverage with a “buy” rating on discount carriers InterGlobe Aviation Ltd, which owns IndiGo, and SpiceJet, the brokerage said the aviation industry is entering a sweet spot with traffic expected to expand at a compounded annual growth rate of 14.5 per cent over the next three years. The domestic aviation market is growing at 20 per cent a year and airlines, which include Jet Airways, Air India, Vistara, AirAsia and other smaller carriers, have ordered an additional 1,000 planes.

It set a price target of Rs1,500 for InderGlobe shares, 27 per cent higher than Friday’s close of Rs1,180.60, saying the leading low-cost airline with nearly 40 per cent domestic market share would likely further expand its foothold by 2020-21 on orders for 450 aircraft. The stock has gained 43.8 per cent in 2017.

HSBC expects shares in SpiceJet, India’s fourth-largest carrier, to reach Rs180, up 24 per cent from Rs. 145.35 at Friday’s close. The brokerage has a “hold” rating on Jet Airways, the second-largest airline, which has been losing domestic market share and has become more reliant on fragmented international market. Its price target for Jet is Rs600, lower than Friday’s close of Rs665.60.

Jet, in which Etihad Airways has a large stake, reported sharply lower profits for the September quarter, weighed down by declining earnings from its international operations.

Geetha Bhaskaran is a journalist based in India.