09/11/2015 4:31 PM IST | Updated 15/07/2016 8:25 AM IST

Industrialists Say Bihar Defeat A 'Good Wake-Up Call' For Modi

Indian Prime Minister Narendra Modi speaks during a public rally in Srinagar, Indian controlled Kashmir, Saturday, Nov. 7, 2015. Modi on Saturday promised a $12 billion federal aid package to boost economic growth in the Indian-controlled portion of the troubled Kashmir region. (AP Photo/Mukhtar Khan)

NEW DELHI -- Foreign investors shook off turbulence in Indian financial markets on Monday after a weekend defeat for the government in a key regional election, but they pressed Prime Minister Narendra Modi to do more to accelerate promised reforms.

Modi needs to win most state elections in the next three years to secure full control of parliament, and the heavy loss in the northern state of Bihar prompted some to fret he could struggle to push through key economic reforms.

After falling as much as 2.3 percent on Monday to its lowest level since Sept. 29, the NSE was 1.2 percent lower as of 1:45 p.m.

The rupee and 10-year benchmark bond fell to their lowest since Sept. 16, but recovered to post milder losses.

"It's a good wake up call for the government," said the chief investment officer of a major asset manager in Hong Kong.

"India's story remains intact. Having said that, the government needs to take positive action to reaffirm that story. They need to speed up reforms by working closely with the opposition, even if (they) will act tougher in negotiations."

India's markets have been far sturdier than other emerging markets, thanks to growth of 7 percent in the April-June quarter and easing inflation, but some of the momentum has waned.

The broader NSE index is down around 14 percent since its record high in early March and is down around 5 percent this year. Flows into Indian debt and equities have reached $14.2 billion this year, a healthy amount but below the $42.4 billion in 2014.

Meanwhile, the NSE index is trading at 18 times one-year forward earnings, making Indian stocks the third most expensive in Asia, according to Thomson Reuters data.

Key reforms proposed include a goods and service tax and land and labour reforms, all of which are expected to boost growth.

However, worries about the government's ability to implement these and other reforms come amid anxiety over a possible Federal Reserve interest rate increase next month. Data on Friday showed U.S. job growth surged in October.

And without reform, the economy is expanding below potential, as earnings grow too slowly to help companies shake off hefty debt burdens and resume much-needed investment.

"The state of the economy and how new investment intentions get translated into earnings growth will decide the direction of the market," said U.R. Bhat, managing director of Dalton Capital, a unit of U.K. investment management firm Dalton Strategic Partnership.

"Bihar will be forgotten in the next 24 hours," he added.

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