This report is from this week’s CNBC Inside India newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Do you like what you see? You can subscribehere
The big story
India will count its political winners and losers in the coming days after the final phase of voting for the General Elections is over.
Separately, the stock market will also deliver its verdict when markets open on Monday.
Although vote counting will not begin until June 4, exit polls from local media are likely to come soon after voting ends on Saturday.
Nervousness among investors over the results has seen India’s VIX index, the market’s so-called gauge of fear, rise more than 135% since April lows.
Investors are worried that the government will be deterred from implementing major economic reforms without a key victory for Prime Minister Narendra Modi’s ruling BJP.
As the BJP-led coalition captured nearly 350 seats, more than 60% in the last Parliament, India headed into elections with markets expecting the incumbents to win a record 400 seats.
A large majority would allow Modi to push through constitutional changes and reform land acquisition and labor laws, which analysts say are crucial to accelerating India’s economic growth.
Traders pushed the benchmark NIFTY 50 to an all-time high last week, closing above 22,967 points, on hopes that the election results would be as expected.
“With the index hitting all-time highs, the market is increasingly pricing in the risk of a surprise downside loss for the BJP-led coalition,” Bank of America analysts said in a recent research note.
They suggest that the equity options market expects the stock to move up or down 4.5% on the first day of trading after the polls close.
It would also suggest that reports of low voter turnout and close races in some constituencies, concerns that initially drove the India VIX, have been brushed aside.
“While the BJP’s pre-election talk of securing 400 seats was perhaps more political hubris than a realistic goal, it went into the election with its largest single-party majority in almost 40 years,” said Bradley Saunders, assistant economist at Capital Economics. . .
“Furthermore, the BJP performed well in the state elections late last year. Seen in that light, the BJP would have had to lose a lot of goodwill in a short space of time to not secure another majority parliamentary.”
In a note to clients, Saunders also pointed to data from the Electoral Commission, which shows that while turnout is lower than the 2014 and 2019 elections, “it is in line with the historical average”.
However, some equity strategists point out that even a landslide victory for Modi’s BJP could hurt the stock market. A classic case of “buy the rumour, sell the news”.
“We see a short-term breach of the 23K sweet spot target, but a quick profit booking brings it back below that level,” Bernstein strategist Venugopal Garre said.
“Continuity of power was known to capital markets, that’s why we had a rally in November/December last year playing again and again on the same theme leading to absurd results for valuations, therefore, we believe that the focus will eventually turn to macro, earnings, growth, valuations reasonableness,” Garre added.
You should know
Temperatures soar to record highs as a heat wave sweeps the country. A record heat wave has gripped Delhi and areas in the northwest and central regions of the country, with temperatures hovering near 50 degrees Celsius (122 degrees Fahrenheit) throughout the week. The Delhi region also recorded its first heat-related death of the year, Reuters reported citing local media.
S&P raises India’s sovereign rating outlook to positive. The credit rating agency said the country’s rapid economic growth was having a constructive impact on its debt profile. Fitch Ratings also said the central bank’s recent $25 billion dividend to the government would reduce the budget deficit next year, a positive development if the deficit continues to decline steadily.
Kolkata Knight Riders won the IPL. Sunrisers Hyderabad did not stand a chance in the final match over the weekend. SRH were all out for 113 in the first innings, the lowest total ever in an IPL title clash. Knight Riders chased down the easy target with eight wickets to spare.
What happened in the market?
Indian stocks fell more than 2% this week. The decline reversed last week’s gains in the Nifty 50. The index is up 3.43% this year.
The benchmark 10-year Indian government bond yield was relatively flat, with a yield of 7% on a better-than-expected reduction in the budget deficit.
On CNBC TV this week, veteran emerging markets investor Mark Mobius said a landslide victory for the BJP would make it a “super, super bull” in India. He also mentioned the sectors for which he is most favored.
Meanwhile, Gautam Chhaochharia, head of global markets for India at UBS, said foreign investors are in a “wait and see mode” ahead of India’s election results despite economic fundamentals looking “very, very strong”.
What’s happening next week?
Counting of votes begins next week, although exit polls will reveal the likely winners over the weekend. India’s central bank will also discuss interest rates next Friday.
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