Macro headwinds could overshadow state election results on Thursday

More than half a dozen exit polls on Monday said the Bharatiya Janata Party will retain power in Uttar Pradesh—a prediction markets would have cheered, seeing it as a precursor to the 2024 General Elections. However, this time around macro headwinds are expected to overshadow state election results. 

“Macro head-winds may limit the euphoria of a BJP win for markets,” said a note by Kotak Institutional Equities. “In our view, the increasing risks of elevated and persistent energy prices and its resulting impact on various macro parameters will remain the dominant theme in shaping market direction in the near term.”

The benchmark Sensex has dropped close to 15 per cent from its peak in October 2021. Bulk of the selloff has come after Russia attacked Ukraine, which has led to skyrocketing crude oil prices and other commodities. This has led to concerns of stagflation.

Results for Uttar Pradesh and four other states will be declared on Thursday. Most polls have also predicted the BJP to win a majority in Manipur, while a close finish in Goa and Uttarakhand. The BJP is expected to lose in Punjab.

Two more states are scheduled to go to the polls this year, including Prime Minister Narendra’s home in Gujarat.

Thursday’s election results will be the first after the repeal of the controversial farm laws and the Union Budget, which largely eschewed populist schemes. The markets cheered the budget as the government increased the outlay for capital expenditure. The budget was hailed as putting economic growth over any political expediency.  

However, some analysts said certain announcements were made with elections in mind. These include bringing parity between state and central government employees concerning tax breaks on employers' contribution to their National Pension System (NPS),  increasing long-term Capex loans to states and tax breaks to cooperatives.

Analysts said the results would test whether these decisions had gone well with the electorate.

"Everyone wants to see if the withdrawal of farm reforms will impact the voting patterns. If it does then, it will be a concern for markets. It's still two years to go for the general elections. Markets will be keenly monitoring the state elections,' said Andrew Holland, CEO, Avendus Capital Alternate Strategies.

UR Bhat, co-founder at Alphaniti Fintech, said a sound victory for BJP in state elections would be considered good for markets because the reform momentum may continue.

"And UP elections are seen as a precursor for general elections. Other states do not matter apart from the numbers in Rajya Sabha. If they do not win solidly in Gujarat, it will not be seen in good light and contribute to uncertainty. "

However, some experts believe the state election results will not have much of an effect as the general election is still two years away.

"The voting pattern keeps changing every 12-18 months. The verdict for parliamentary elections need not be similar to state elections. People who read too much lost the market opportunity during the last cycle. The only concern at the time is oil prices," said G Chokkalingam, founder at Equinomics.

However, the impact of high oil prices will not reflect in this election results as the centre has not yet revised prices of petrol and diesel. The market is keenly eyeing the government’s next move in this regard as international Brent crude prices have soared past $130 a barrel.

“The government may have to reduce excise duties of diesel and gasoline, increase minimum support prices (MSPs) sharply and spend higher-than-allocated amounts in rural and social sector schemes, in order to provide some buffer to economically-weaker households,” says the note by KIE.