How will the markets interpret the outcome of Karnataka Assembly polls?

The outcome of the Karnataka state elections can trigger a knee-jerk reaction in the markets at best, believe analysts, as they have other things such as progress of monsoon, falling rural demand, corporate results for the March 2022 quarter (Q4-FY23) to worry about over the next few months. At the global level, interest rate trajectory of central banks, crude oil prices, movement of the dollar index and geopolitical situation are some of the factors that will be keenly watched.

The outcome of a state election, analysts believe, does not necessarily determine the outcome of the national elections. In the past, citizens have voted quite differently for the state and national elections. While the markets are likely to analyse the upcoming election in Karnataka to assess some underlying trend, it can, at best, bake in some uncertainty discount in the course of the next one year as the nation prepares for the general election.

That said, calendar year 2023 (CY23) from here on is peppered with state elections, which includes Karnataka (in May), Madhya Pradesh, Chhattisgarh (both in November) and then Rajasthan (December).

Though the markets will prefer that the Bharatiya Janata Party (BJP) keeps important states under its fold, Ambareesh Baliga, an independent market analyst, does not see the markets being derailed for long in case BJP is unable to come to power in Karnataka.

“The markets will cheer if the BJP is able to form the government in Karnataka. If that were to happen, there can be a sharp up move in the markets immediately post the exit polls, which will be followed by a stronger momentum once the election results are announced. On the other hand, if the BJP were to lose, markets could see a temporary correction and would come back on track in a hope that the electorate would vote differently in the assembly elections versus the general elections,” Baliga said.

Besides the outcome of Karnataka state polls, Baliga believes the markets will be guided by corporate earnings, progress of monsoon and crude oil prices. Globally, issues such as recession fears and the banking crisis in the US. The markets, he believes, have taken the Russia – Ukraine war as the ‘new normal’.

Meanwhile, as the battle for Karnataka hots up, both BJP and the Congress are out to woo voters. From developing Karnataka into a hub for electric vehicles, measures for agriculture, implementing the uniform civil code, boosting public healthcare infrastructure, BJP has listed six promises in its manifesto — Anna (food security), Abhaya (social welfare), Akshara (education), Aarogya (health), Abhivrudhhi (development), and Aadaaya (income).

The Congress manifesto, on the other hand, mentions five guarantees: Gruha Jyothi, Gruha Lakshmi, Anna Bhagya, Yuva Nidhi, and Shakti. Besides rolling out agriculture, insurance, infrastructure and job-related schemes, it promises to increase the reservation ceiling from 50 to 75 per cent if voted to power to accommodate the ‘hopes and aspirations’ of Scheduled Castes (SCs), Scheduled Tribes (STs), Other Backward Classes (OBCs), religious minorities, Lingayats, and Vokkaligas.

G Chokkalingam, founder and head of research at Equinomics Research & Advisory, too, suggests that the outcome of the Karnataka assembly polls can, at best, see a minor sentimental impact on the markets in the short run, but is unlikely to deter the overall course of the markets in the run up to the general elections in 2024.

“Karnataka accounts for only around 5 per cent (28 seats) of the total Lok Sabha strength. Even if the BJP party loses power in Karnataka but manages to retain even 40 – 50 per cent of its current strength in the state, the markets will tend to believe that the objective of voters in an assembly poll versus Lok Sabha elections differs quite significantly. Hence, they are unlikely to be impacted significantly post Karnataka election outcome,” Chokkalingam said.