Optimism surrounding the prospect of a fresh Indian government has set Indian stocks on a tear, but one analyst told CNBC stocks are due for a 7 to 8 percent correction once the euphoria of the elections dies down.
India's official parliamentary election results will be released on Friday, and the market has priced in a strong win by the charismatic Narendra Modi, and his Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA) alliance, which is considered more investor friendly than the incumbent Congress party.
Indian equities powered 3.3 percent higher soon after open on Friday, hitting fresh record highs. Over the past three months, Indian equities have surged around 22 percent in anticipation of a Modi win, while the rupee has gained near 5 percent against the dollar year to date making it one of the best performing emerging market currencies. But some analysts told CNBC they were concerned that any disappointment on these expectations could lead to pain for investors.
"The markets have already factored in a significant part of Modi coming in with a very, very clear majority... I would not be surprised to see at least a 7-8 percent kind of correction if the market does not see at least 230 plus [seats won]," said Nitin Jain, chief executive officer of capital markets at Edelweiss Financial Services, referring to the number of seats BJP-NDA is expected to secure in India's lower house of parliament.
Although Modi is the clear frontrunner in the world's largest democratic exercise in history, all eyes will be on the margin of his victory. Polls have predicted the BJP-NDA alliance will win with a simple majority at 276 seats, with the BJP getting 232 seats. An alliance requires 272 seats to gain a majority of the 543 seats in India's lower house of parliament. If a majority is not achieved it could make it difficult for policies to be pushed through quickly.
According to Jain, markets will likely give Modi a three month grace period, but after that period has subsided stock prices could begin to consolidate and drift lower.
"I think the first three months post this news will still be euphoria, people will still believe in the expectations that have been set - it's only after that three-month period has passed that people will start to realize that a lot of things will take some time to change," he said.
Modi's economic agenda has encouraged investors. His plans include reviving the manufacturing sector to create millions of jobs, reforming labor laws that make it difficult to fire employees and ploughing money into infrastructure.