Markets not yet factoring a major upset for BJP in upcoming state elections

Markets, according to analysts, have not yet factored in the possibility of a major upset for the Narendra Modi-led Bharatiya Janata Party (BJP) / National Democratic Alliance (NDA) in the upcoming elections in five states – Chhattisgarh, Rajasthan, Madhya Pradesh, Mizoram and Telangana.

The polls are being viewed as a run-up to the general elections scheduled for May 2019 and will test the popularity of the government and its policies amid rising crude oil prices that can trigger a rise inflation going ahead, developments pertaining to bank and non-bank finance companies (NBFCs) and a sliding rupee.

“The markets are gradually realising that it will not be easy for the NDA to secure a simple majority in key states. Given the other domestic and global cues, they are likely to remain choppy ahead of the event and are yet to fully price in a major upset for any pan-India political party in the upcoming state elections,” says G Chokkalingam, founder and managing director at Equinomics Research.

A recent survey predicted that the Congress may return to power in Madhya Pradesh and Chhattisgarh after nearly 15 years. Rajasthan, currently with BJP as the incumbent government, is also likely to face stiff competition as the state has generally alternated since 1998 between the Congress and the BJP holding the reins of power.

This time around, however, opinion polls predict a bounce-back for Congress in Rajasthan, where Chief Minister Vasundhara Raje seems to be struggling against a strong anti-incumbency factor.

In case any pan-India party fails to secure an absolute majority and has to depend on a bunch of smaller parties to form the government, Chokkalingam expects the markets to correct around 10 per cent as a knee-jerk reaction.

U R Bhat, managing director at Dalton Capital agrees and says the fortunes of the markets are linked to the outcome in Rajasthan. “There is still nervousness in the markets, as the recent opinion polls do not suggest a return for the current ruling party (BJP) even though it may be a close fight in the other states. This is a cause for worry for the markets as regards the upcoming state elections. In a worst-case scenario, the Nifty50 can slip to 9,700 levels,” Bhat says.

After a stellar calendar year 2017 (CY17) that saw the 50-share Nifty rallying 27 per cent, markets have registered a 3 per cent fall on a year-to-date basis thus far in CY18 10,200 levels. Other emerging markets such as Brazil, Taiwan and Thailand have also seen a correction during this period, but outperformed India, data show.

“The recent developments coupled with major elections in the next nine months are likely to keep market volatility high. Despite the recent correction, equity market remains vulnerable on both valuation and earnings concerns. Despite 16 per cent correction in 2018, rupee remains under pressure to depreciate. It can reach 78 per dollar in the next six – nine months,” says a recent report from Anand Rathi institutional equities.

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