The outcome of the first of three key events of March left the market disappointed after the Congress party suffered a setback in state elections, which, leading players said, would hit reforms.
Stock market investors had an expectation the Congress would have a say in the government formation in Uttar Pradesh, the country’s most populous state, and in turn get support to push stalled reforms.
The Mulayam Singh-led Samajwadi Party’s decisive victory in the state sparked concerns the policy inertia at the Centre might continue.
Key indices, the Sensex and the Nifty, declined more than one per cent each to their lowest levels in more than a month on Tuesday. The Sensex had gained more than 300 points during the day after preliminary trends indicated the SP would need support from the Congress. Later, as it emerged the SP was set to emerge a clear winner, the index collapsed more than 500 points from the day’s high.
The Sensex fell 189.58 points, or 1.09 per cent, to 17,173.29, its lowest close since January 30. The Nifty closed down 57.95, or 1.10 per cent, at 5,222.40. The fall in the equity markets also weighed on the domestic currency, which fell to its lowest level since January 25 against the greenback. The rupee closed at 50.38 compared to its previous close of 49.85 to the dollar.
“The government at the Centre has weakened further after the state election results,” said Piyush Garg, chief investment officer at ICICI Securities. “The market fell sharply from the day’s highs on worries the government might get more populist.”
Terming the results a negative surprise, Citi India said the Congress could get more cautious, handing out more sops and moving further away from reforms. While the general elections are due in 2014, the strong performance of regional parties has fuelled the possibility of mid-term polls.
A fall in most global markets due to economic growth concerns in China and Europe also dented investor sentiment. Most Asian markets closed more than one per cent lower, while European markets had opened nearly two per cent lower.
"The election outcome can't be good for the market,” said Saurabh Mukherjea, head of equities, Ambit Capital. “The global economy continues to be on a weak footing. For further direction, the market will look for more clarity on the next round of quantitative easing from the US.”
"We were not gung-ho on the Indian markets after their recent run-up,” said Sanjeev Prasad, senior executive director, Kotak Institutional Equities. “A lot of expectations are getting built in, which don't seem to likely to be achieved.”
Foreign investors on Tuesday sold shares worth Rs 241 crore while domestic investors bought stocks worth Rs 180 crore, according to provisional figures.
