India's stock market shot to record highs early on Thursday on news Narendra Modi was easily securing a second term, but all gains vanished as investors took profits and started looking at the broader fundamental issues facing the economy.

The broader NSE index, which on early vote results surged 2.58 per cent to a record 12,041.15, closed down 0.69pc at 11,657.05.

The benchmark BSE index, which reached an all-time high of 40,124.96, ended 0.76pc lower for the day at 38,811.39.

“Giving credence to the old adage 'sell on facts', the domestic markets witnessed a sell-off on the election results,” said Joseph Thomas, head of research at Emkay Wealth Management in Mumbai.

After Modi's big victory, “the focus will now be entirely on the agenda before the new government, and how they are going to address the economic realities around rural incomes and job creation,” he added.

The partially convertible rupee also surrendered its early advance. It ended at 70.02 per dollar versus a previous close of 69.6750 after earlier rising to the session high of 69.3750.

Unlike Indian stocks and the rupee, bonds held on to some gains. Low inflation, ample liquidity support from the Indian central bank and expectations of easier monetary policy helped sentiments.

The benchmark 10-year bond yield closed down 2 basis points at 7.24pc after earlier touching 7.19%, its lowest level since April 9, 2018.

Indian Prime Minister Narendra Modi was sweeping to a huge election victory, giving his party the mandate to pursue business-friendly policies, as well as continue to take a hard line on national security and muscular Hindu nationalism.

Thursday morning's stock market surge reflected investors' comfort with a big Modi win. They largely view his National Democratic Alliance as more pro-industry than the opposition-led Congress.

Modi's government had mixed success in its first term, facing criticism for slowing growth and a failure to create jobs while winning plaudits for implementing tough tax and banking reforms and infrastructure spending.

Investors expect a second term will give Modi time to carry through those reforms while pushing for more fiscal and monetary stimulus.

From a shortage of job opportunities and a stuttering economy to tense ties with old foe Pakistan, Modi will face a host of challenges after winning a big majority on Thursday.

The NSE index rose 64.8pc during Modi's first term, through Wednesday's close.

Buy-on-dips?

Getting the index to stay above 12,000 “will be difficult for the market because now the reality will kick in, people will go back to results and global cues,” said Samrat Dasgupta, CEO at Esquire Capital Investment Advisors. “I feel there is only a limited upside."

“I do not expect a big correction but definitely some consolidation for the next couple of months before the new cabinet's policies kick in. I feel one big uncertainty has been removed so it becomes a buy-on-dips market again.”

Rajeev Pawar, a group head at Edelweiss Financial Services, said any sustained market rally would require “concrete steps to address liquidity and credit stress”.

“Revival, reflation and reform should be the mantra going ahead,” he added.

Investors said the health of the corporate and financial sectors was of paramount concern.

“The successful execution of the insolvency and bankruptcy code and corrective action to rein in non-performing loans in the public banking sector would enable financial institutions to support the next round of credit growth,” said Leong Lin-Jing, Asian fixed income investment manager at Aberdeen Standard Investments.

“If Modi can implement the rest of his reform measures during his second term, it will certainly increase India's growth potential.”