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Markets react to election shock

Chidambaram: India?s finance
minister notes that ?if economic
growth happens, everything else
will fall into place?

The national elections held in May have cast a shadow on India's shining economic story. Foreign investors are reassessing growth prospects now that the Congress Party, which relies on communist allies, has taken over. A jump in the annual inflation rate to 5.5% in early June caused bond yields to rise to a one-year high, and the rupee slid as foreign portfolio investors sold over $700 million in the six weeks from May. Those investors had pumped a record $7 billion into the Indian stock market last year and a further $4 billion in the four months to April this year.

Coalition governments are not new to India. Nor is there any reason to suspect the economic reform credentials of the Congress Party, which started India's economic reforms in the early 1990s. But foreign investors are painfully aware of the changes in direction that economic policy can take when allies inside and outside the coalition set out to thwart or slow the pace of reform.

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