Will stock market crash if BJP gets less than 270 seats in Lok Sabha polls?

The Lok Sabha 2024 polls are nearing their end with just two phases out of the seven of the Lok Sabha 2024 polls left. The markets, in this backdrop, have been volatile with the S&P BSE Sensex and the Nifty50 being unable to cling on to higher levels.

While most analysts expect the current National Democratic Alliance (NDA) government led by Bharatiya Janata Party’s Narendra Modi to return as the prime minister for the third consecutive term, the party’s call for over 400 seats in the ongoing polls, analysts said, may be a daunting task.

In the worst case scenario where the NDA is unable to secure a majority (seats less than 272), analysts at Bernstein expect ‘heavy profit booking’ in the markets with low or negligible returns for the markets this year.

Business sentiment in the near-term will decline, Bernstein said, and tax breaks and subsidies for poor may be financed by more taxes on corporates or rich. Foreign direct investment, too, will fall. In such a scenario, Bernstein expects heavy government outlay on salaries, increased MGNREGA wages and a sharp increase in the fiscal deficit, which it feels can go beyond 5.2 per cent for the current as well as next fiscal. CLICK HERE FOR A DETAILED CHARTICLE

"There will be drastic effects on infra in the near-term. Funds will be diverted out of infra projects towards social initiatives. Private sector will be pushed to participate in infra, which will lead to only the most viable projects emerging as others are shelved. 10 kg free food distribution will lead to depletion of stocks and universal basic income (UBI) / Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wage increase will raise demand for other goods. Inflation likely to go beyond 6 per cent in the near-term, wrote Venugopal Garre, managing director at Bernstein in a co-authored note with Nikhil Arela.

That said, the NDA getting less than 270 seats in the Lok Sabha polls is not Bernstein's base-case scenario. They see a higher probability of around 330-350 seats driving some rally in the markets post-election results. They expect the Nifty 50 index to scale past the 23,000 mark, but see a swift profit booking once the general election outcome is known.

"The focus will soon shift to macro fundamentals and new government policies, a welcome change from discussions on 400 versus 300 versus 250. Continuity of power was known to equity markets, which is why we had a rally in November / December 2023 - playing again and again on the same theme leads to absurd outcomes for valuations. Hence, we believe the focus will eventually return to macro, earnings growth, reasonability of valuations etc.," Garre wrote.

The markets, according to Rahul Arora, chief executive officer for institutional equities at Nirmal Bang, do not believe that the NDA will cross the 400 mark and the ‘Abki Baar 400 Paar’ narrative of the NDA may not eventually hold true. WATCH THE FULL INTERVIEW HERE

“That said, the markets are assuming at this stage that the current dispensation will return with an absolute majority. They are not fixated with any Lok Sabha particular number/tally,” Arora said.