BJP's coalition govt may not be 'reformist'; what it means for markets?

Indian bourses retreated heavily on Tuesday, as most exit polls were proved wrong by the early result trends for the Lok Sabha polls. The benchmark Sensex plunged 4,389 points, down 5.74 per cent at 72,079 levels, while Nifty50 fell 1,379 points, down 5.93 per cent to 21,880 levels. 

In the broader markets, the selling by investors was quite heavier than benchmarks as BSE SmallCap  index closed 6.79 per cent lower while the MidCap ended over 8 per cent in losses. 

Among sectoral trends Nifty FMCG was the sole winner in a bleeding market, gaining 0.95 per cent, while Nifty PSU Bank, Oil and Gas and Metal, fell by 15.14 per cent, 11.80 per cent and 10.63 per cent, respectively. 

Why did markets crash today?

According to analysts, markets reacted sharply to the initial trends of the NDA leading on around 290 seats which look way behind the exit polls which were projecting around 350-370 seats. However, they believe NDA is still in position to form the government. 

As of 04:51 PM; the BJP led NDA was leading 296 seats, while the INDIA alliance was ahead on 229 seats. Within NDA, BJP contributed 243 seats, while the INC’s tally stood at 98 seats.  

“With the NDA still looking to form a government, though with the important support of coalition partners, markets look jittery about the prospects of strong decision making. Markets believe that the reformist approach, which was a hallmark of the previous two terms, might take a backseat in the third term,” said Manish Chowdhury, Head of Research, StoxBox. 

However, analysts stressed that it is still early to jump to conclusions and one should ideally wait for a clearer picture. 

What does this mean for political stability?

Going by the Lok Sabha election results trend, Analysts now believe that a coalition government for the BJP seems all the more probable. 

According to Yashovardhan Khemka, senior manager, research and analytics at Abans Holdings, election results showing less than halfway mark for the current BJP government, points towards a coalition government. 

This, he said, will mean dependence on allies in making key policy decisions, and sharing certain cabinet seats, which will lead to policy paralysis and uncertainty in the government’s functioning.

“The markets are pricing the risk associated with this scenario, and the potential impact of a shift toward socialist policies by the government, thus leading to sell-off in the market,” Khemka added. 

That said, some also believe that India is a long term structural growth story and a lot of elements are in place including the economy. 

Manish Jain, Director, Institutional Business Division at Mirae Asset Capital, said that India is already in top in factors like GDP, market cap, demographic dividend etc. and it is an ongoing endeavour for all policy makers to take the country to new heights. 

“I don’t think any derailment on these efforts is in anybody’s interest. As a country we have seen many regime changes. Businesses and markets have weathered all of it and good businesses have always rewarded the investors. If valuations get more reasonable from here on because of some factors, more the reason to invest in India further,” Jain added.