Indian shares set records, the rupee gained and bond yields dropped early on Monday as exit polls pointed to a third term and sizable mandate for Prime Minister Narendra Modi, with investors eying public spending to maintain economic momentum.

The broader Nifty index rose as much as 3.59% to a record 23,338.70 points while the BSE index surged 3.76% to a lifetime peak of 76,738.89. The Nifty 50 index posted its best intra-day gain since Feb. 1, 2021.

The benchmark 10-year government bond yield touched 6.9421%, its lowest since April 8, 2022, falling 4 basis points from its previous close. The rupee strengthened to 82.9575, its highest since March 19.

All markets had pulled back slightly by midday trade but were still very much in the green on the day. The Nifty and BSE index have both nearly doubled since their close a day before election results in 2019.

Weekend exit polls projected the alliance led by Modi's Bharatiya Janata Party (BJP) to increase its 303 seats in the 543-member lower house and likely get a two-thirds majority - enough to initiate amendments to the constitution.

A win had been widely expected but, if confirmed in official results due on Tuesday, the margin will be larger than analyst forecasts and will be seen as a positive for equity markets that have scaled record highs on the back of economic growth.

"The markets, at the moment, are pricing in a continuation of this government's policies and approach towards economic management," said ITI Mutual Fund Chief Investment Officer Rajesh Bhatia.

"We would expect the government to continue with the current policy approach of large capital expenditure, focus on production linked incentives, to push the growth cycle further," Bhatia said, adding the new government should stay away from taxation policies that hurt capital investment.

POLITICAL CONTINUITY

India's economic growth accelerated to 8.2% in the financial year to March 2024 led by government spending on infrastructure and a boom in real estate, data showed last week.

If a Modi victory is as strong as indicated by the exit polls, analysts think he would have the political capital to keep going and perhaps even push for tougher land or labour reform.

"If exit polls prove correct, it would be a vote for continuity," Citi analysts said in a client note.

"Medium-term, we expect stocks positively exposed to the focus on infrastructure/logistic and industrial/manufacturing to do well," they said, noting Adani Ports, conglomerate Larson & Toubro and Bharat Electronics as among likely beneficiaries.

Investors also expect the Modi government to continue focusing on turning the country into a manufacturing hub - a project that has courted foreign companies including Apple and Tesla to set up production as they diversify beyond China.

Foreigners, who poured a net $20.7 billion into Indian equities last year but had pulled back ahead of the election, may also see the vote's conclusion as an excuse to buy.

"Most clients we met with in recent months appeared to infer that political continuity would contribute to a stable macro-economic environment and continuing reforms," said Goldman Sachs analysts.

India's exit polls have a patchy record, often getting the outcome wrong. The results of the general election among a billion eligible voters are to be announced on Tuesday.

"We can expect the sharp rally in the market to sustain, particularly in large-cap stocks, as foreign investors are likely to resume buying Indian equities after a period of continuous selling" if the BJP win is as comfortable as projected, said Swastika Investment Managing Director Sunil Nyati.

(Reporting by Tom Westbrook, Ankur Banerjee and Bharath Rajeshawaran; Writing by Swati Bhat, Editing by Christopher Cushing)