BJP seat wins: How stock market may react to exit polls, election outcome

Indian equity markets have turned volatile lately with all eyes set on June 4 as the Dalal Street participants are keenly awaiting the outcome of six-week long polling-exercise in the largest democracy of the country in seven phases. With 89 per cent of polling already done, the remaining 57 seats in the general election will vote in the seventh and last phase on Saturday, June 1.
 

Profit booking at higher levels in the stock market has been a synonym to political uncertainty as pollsters and political pundits differ on the possible outcome of the elections with lower voter turnout and apathy seen as risks for the government of Prime Minister Narendra Modi and his Hindu nationalist Bharatiya Janata Party (BJP).
 

Stock market investors have turned jittery over what lies ahead. Market participants shall be glued to the TV screens to take notes from exit polls, which will flood over the weekend and markets to react to them on June 3 and the D-Day, election outcome, set to sway sentiment on June 4.
 

Rajasthan's Phalodi Satta Bazar is suggesting a seat count of around 300 for BJP alone, higher than 290 a few days ago, as per various media reports. As per a Business Today survey, analysts and the stock market are factoring in a clear majority for BJP, where analysts expect the saffron party to win 300-320 seats on its own.
 

To recall, BJP alone won 303 seats on its own, while its coalition monikered as National Democratic Alliance (NDA) won 352 of the 543 seats in India's lower house of parliament at the last election in 2019. In the opinion polls released in early April, BJP was expected to sweep the general elections of this year.
 

If BJP is able to strengthen its position further, or at least continue to repeat the previous performance, Benchmark indices-Sensex and Nifty50 could rally 4-5 per cent in this scenario, said Abhishek Goenka, founder of IFA Global, a forex consultancy and asset management firm.
 

If the BJP wins a stronger majority than 2019, equity markets will rally in anticipation of growth-supportive economic policies, such as spending on infrastructure and a push for the manufacturing sector, told Rajesh Bhatia, chief investment officer of ITI Mutual Fund to Reuters, the news agency.
 

Other assets like the rupee and bond yields may also see some recovery. "The Rupee could appreciate to around 82.80 levels against the dollar from 83.32 at the close on Thursday, while the benchmark bond yield may dip to 6.90-6.92 per cent from near 7 per cent currently," VRC Reddy, treasury head at Karur Vysya Bank.
 

Modi's return is viewed by the market as a positive because it demonstrates political stability and implies policy continuity, said James Thom, senior investment director of Asian equities at abrdn, based in Singapore to the news agency.
 

In case BJP comes to power with fewer seats, at least 272 seats on its own and able to form a full majority government, the market may further volatility in the short-term but the dust will settle quickly. Even the BT survey reveals mild correction markets on a mixed results scene.
 

The market seems to have already adjusted to the possibility that the margin of victory for BJP and its allies may be lower than earlier estimated, said Gaurav Dua, head of capital market strategy at Sharekhan, reported Reuters.
 

On the other hand, Umeshkumar Mehta, chief investment officer at Samco Asset Management believes that a seat count below 300 for the current government will not alter the market's trajectory, while Vijay Sharma, senior executive vice president at PNB Gilts believes that The rupee and bond yields may not see a significant reaction in this case either, said the Reuters report.
 

The third and least priced scenario is a loss for BJP and a possible coalition government led by INDI alliance. If this happens, the market may see a strong sell-off in the knee-jerk reaction, until the economic policies of the newly formed government is clear. The market is likely to remain jittery amid the mixed views on political stability in the country.
 

Kotak Alternate Asset Managers' Chief Investment Strategist Jitendra Gohil has warned that the stock market may fall over 20 per cent and should take time to fully recover if the NDA alliance fails to form the next government. Ahead of exit polls, Gohil said his investment committee maintained a neural stance on equities i.e. to stay invested inline with asset allocation.
 

"While saying probability of such an outcome is thin, Gohil said it is prudent for investors to diversify portfolio and reduce risks ahead of the election results, as the upside could be limited but downside could be severe," he said.
 

The market is hoping for continuity, so another party winning could lead to a knee-jerk reaction, said Mittul Kalawadia, senior fund manager, equity, ICICI Prudential Mutual Fund to Reuters. "Whether in the long run things are positive or negative we will know later, but in the short-term any change which impacts policy level continuity will be a big negative," he added.
 

As per the Reuters' report, IFA Global's Goenka said he expects an up to 10 per cent fall in benchmark stock market indices in such a scenario immediately after the verdict, while Sharekhan's Dua said the fall could be as large as 15-20 per cent.
 

In this scenario, the central bank may intervene to stem a decline in the rupee, said Anindya Banerjee, head of foreign exchange research at Kotak Securities, reported the global news agency. Foreign outflows in bonds could lead to an immediate rise of 10-15 basis points in yields, it added quoting Banerjee.