On Tuesday, the Sensex crashed 4,389.73, or 5.74 percent and the Nifty 50 tanked 1,379.4 points, or 5.93 percent due to an unexpected Lok Sabha election outcome. The Bharatiya Janata Party (BJP) secured 240 seats, much below the exit polls prediction. However, the BJP-led National Democratic Alliance (NDA) managed 294 seats, making sure a third term of Prime Minister Narendra Modi.

The rise in the indices on Wednesday was on account of investors absorbing the unexpected Lok Sabha election results, analysts said. The surge in the market was supported by domestic institutional investors (DIIs) even as foreign portfolio investors (FPIs) remained net sellers of local shares for the second consecutive day. FPIs offloaded Rs 5,656.26 crore of equities.

“Indian market exhibited a spirited recovery driven by broad based buying across various sectors, as political stability appears assured,” said Vinod Nair, Head of Research, Geojit Financial Services.

Analysts said that although the NDA will form the government at the Center but with a slimmer majority. However, the new government will pursue an investment-led economic agenda.

“NDA will form the Modi 3.0 government with coalition partners. With this, the market will likely gain confidence in the political stability as well as the political stability. Some positive recovery is hence expected going forward,” Axis Securities said in a report.

Falling short in the majority will indeed pose some challenges to the premium valuation of the Indian market as it was trading at a premium valuation to other EMs (Emerging Markets) before the event, which was on the expectations of political and policy continuity.

The report said policy reforms are likely to continue in Modi 3.0 but some positioning may shift towards populist measures which could pose challenges on the fiscal prudence path.

The market capitalization of BSE-listed companies rose Rs 13 lakh crore to Rs 408.06 lakh crore, after falling over Rs 31 lakh crore to Rs 394.83 lakh crore on Tuesday. India VIX, the volatility index, which zoomed 51 percent to 31.71 during intraday trades on Tuesday before closing at 26.75, declined 30 percent to close at 18.89.

On Wednesday, domestic institutional investors (DIIs) turned buyers of equities after they bought Rs 4,55,08 crore of shares. They sold Rs 3,318.98 crore of equities the previous day.

In the last two trading sessions, FPIs have sold Rs 18,092.48 crore of domestic shares, as per the BSE’s provisional data.

FPI outflows over the recent past are mainly due to relatively expensive valuations of Indian equities (vs markets like China) ahead of the elections whose outcome was uncertain, said Deepak Jasani, Head of Retail Research, HDFC Securities Ltd.

“Now that the election results are out and once the government is formed under the NDA coalition, foreign investors may be more comfortable investing in India, especially on correction days,” he said. Events like the passage of a vote of confidence, the announcement of the council of ministers and their portfolio allocation, and policy announcements (including the Union Budget) could lead to an increase in the confidence of foreigners, Jasani added.

Shares of Power Grid Corporation, State Bank of India and NTPC rose 0.96 per cent, 1.86 per cent and 2.88 per cent, respectively. The Nifty PSE gained 2.51 per cent and Nifty CPSE rose 2.17 per cent. Both the indices had dropped over 15 percent on Wednesday.

NSE firms that gained the most included Adani Ports (7.29 per cent), IndusInd Bank (7.06 per cent) Hindalco Industries (6.46 per cent), Tata Steel (6.32 per cent) and Mahindra & Mahindra (6.06 per cent).