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Though the exit polls announced on May 12 point to the formation of a stable government at the centre led by National Democratic Alliance (NDA) headed by Narendra Modi, any disappointment will see the markets react sharply on the downside on May 16 and over the next few months as well, analysts say.
Past experience suggests that in the past either opinion poll or exit polls have failed to predict the national mood accurately. During the last two general elections the number of seats predicted for the NDA was higher than the UPA. Also, the margin of error was embarrassingly large during these two occasions. The exit polls, however, have been a fairly accurate predictor during Assembly elections.
"We view exit polls with some caution based on the results in 2004 and 2009, and especially in this case where there appears to be a differential between them and the majority of pre-election opinion polls. Additionally, the bar to exceed expectations on the final counting day (16 May) has moved even higher," suggest Sonal Varma, Aman Mohunta and Alastair Newton of Nomura.
Says Jyotivardhan Jaipuria, managing director and head of research, Bank of America-Merrill Lynch: "Most exit polls have predicted a majority (or close to majority) for BJP led NDA. However, exit polls have a chequered past as far as their reliability is concerned. We believe the market is currently pricing in a stable coalition."
"In case of a shock result, however, we see a steep correction in the market as hopes for an early revival in the economy gets diminished. In the case of a fractured mandate, markets could correct by 15-20% from current levels," he adds.
In case the NDA wins less than 200 seats, Siddhartha Sanyal and Rahul Bajoria of Barclays suggest that the BJP-led NDA would face difficulties forming a government leading to greater uncertainty. This is the most negative scenario for all INR assets, potentially spanning the medium-to-long term.
"USD-INR will likely trades toward year-to-date (YTD) high of 63.31 as a knee-jerk reaction. A large political risk premium is established as future economic policy becomes very unclear. Some foreign investors likely liquidate equity positions, given increased uncertainty and decent YTD gains," they said.
Exit polls have predicted the NDA to be the largest pre-poll formation to form the next government in Delhi which is in line with market's expectations. However, given the recent market rally, Dinesh Thakkar, chairman and managing director at Angel Broking believes that the possibility of an up move from these levels would depend on the incremental seats that can be won by the NDA over the consensus exit poll range of 257 - 280.
Explains J K Jain, head of research, Karvy Stock Broking: "The markets could respond differently post the announcement of election results that present any of the three possible scenarios - Scenario 1: NDA getting above 260 seats , Scenario 2: NDA getting around 220 seats and Scenario 3: NDA getting less than 200 seats."
"We are of the opinion that Nifty could gain over 15% (7,900-8,000) in the next six - nine months if Scenario 1 pans out; (Nifty) could move within 6,300 - 7,300 range in the next three months in case of Scenario 2; and correct over 15-20% in the next three - six months in case of Scenario 3," he says.
Neelkanth Mishra, India equity strategist for Credit Suisse said in a May 7 client note that a strong surprise (upward or downward) to the 230 - 240 seats expected for the NDA is unlikely and a 210-250 range has high probability.
"We do however believe that hopes of a 12-month turnaround in the investment cycle may get dashed. Market positioning towards cyclical sectors doesn't necessarily mean a reversal, but builds the case for a disappointment. We are constructive on the broader market, but cautious on cyclical sectors: Financials (SBI, ICICI Bank), Industrials (L&T), Metals (Tata Steel)," he said.
