Modi can strengthen rupee: Nomura

The Modi-effect can prop the rupee to 58 to the dollar and gross domestic product (GDP) growth to 6 per cent in 2015, the report said, adding that it will have only a little impact on growth this year as it sees the economic expansion to be just 5 per cent.

In its report, Nomura describes the ongoing elections as "the most important in many years" for financial markets, and "a make-or-break event for the nation's medium-term prospects".

Blaming the "imprudent" fiscal policy and a lack of supply-side reforms, the report noted that animal spirits are low and the economy is stuck in a stagflation-type situation.

"Hence, the outcomes of these elections are important," it said, as a stable government focused on economic reforms could reinvigorate the dormant animal spirits, ease business uncertainty and address the supply bottlenecks.

The report, titled 'India's defining moment' is authored by Nomura's India chief economist, Sonal Varma, her team and its global political analysts Alastair Newton and Craig Chan.

A clear mandate can swing investor sentiment significantly as prospects of higher productivity and a revival of the investment cycle boost potential growth, ease supply-side constraints and make room for rate cuts, which may further boost investments.

It said that "if the election results in a hotchpotch coalition or a third front, it would diminish prospects of structural reforms to revive potential growth and could risk significant capital outflows and monetary policy tightening even further".

"Hence, we see the forthcoming elections as a make-or-break event for the medium-term prospects."

On the impact on the economy, the report, however, sees a medium-term positive spin.

"It can help "accelerate economic reforms and coupled with continued prudent monetary policy, set the stage for a steady improvement in the nation's macroeconomic fundamentals...in turn will take GDP to 6 per cent in 2015."