(June 6): Indian stocks are headed for second day of gains on Thursday, as Indian Prime Minister Narendra Modi is on track for a third term in power after two key allies pledged their support to form a new government.

The NSE Nifty 50 Index rose 0.9%, extending Wednesday’s 3% rally, as the benchmark continued to recoup losses, following the shock election result that saw Modi’s party losing its majority in parliament. The broader market outperformed, with a gauge for smaller companies rallying 3.3%.

Investors will be closely watching who will be appointed to key cabinet portfolios and whether the coalition’s policies align with the previous administration’s focus on boosting infrastructure and manufacturing.

“Markets will keenly watch certain key ministries, such as finance or road and highways, and whether there are credible faces heading them,” said Niraj Bhagwat, equity portfolio manager at Wellington Management. “Foreign investors will be enthused to see the key ministries largely unchanged in terms of policy direction.”

Leaders of the the Bharatiya Janata Party-led National Democratic Alliance, including Nitish Kumar of the Janata Dal (United) and N Chandrababu Naidu of the Telugu Desam Party, agreed to back Modi after reaching an accord in New Delhi on Wednesday.

The renewed interest among likely heads of various ministries comes as investors assess the likely concessions Modi may have to make in a coalition government. It wasn’t immediately clear on Wednesday as to what demands were made by the two leaders and to what the BJP agreed in order to secure their support.

“We expect the market to remain obsessed with government formation exercise,” said Gautam Duggad, an analyst at Motilal Oswal Securities Ltd.

Despite Wednesday’s upward move in stocks, institutional flows offer some caution for now. Foreign investors dumped US$1.5 billion worth of Indian equities on Tuesday and extended the selloff by another US$678 million on Wednesday, according to provisional data from the NSE. Local mutual funds and banks, however, resumed to buying, as they purchased US$546 million worth of shares on Wednesday.

“Investors should look through the near-term uncertainty and consider the beneficial long-term consequences of India’s surprise election results,” Jean Chia, global chief investment officer at Bank of Singapore, wrote in a note. While being neutral on India in Asia allocation, “we favour domestic sectors and industries that could benefit from the BJP’s 2024 Manifesto, which includes tourism, agriculture, (and) housing,” she said.