India’s benchmark BSE Sensex index shed over 5% in value yesterday alone and lost over 4,000 points, as early election results showed the incumbent prime minister Narendra Modi’s Bharatiya Janata Party is on course to a significantly narrower victory than markets had expected.
Yesterday’s drop was the biggest single day fall in Indian equity markets since the onset of the coronavirus pandemic in early 2020. Companies from practically every industry posted declines. Bank stocks fell by an average of 7.8%, infrastructure by 10.5%, and oil and gas stocks by 11.7%. At least $386 billion was erased in market value.
The Indian rupee has also neared an eleven-month low in response to these election results while yields on ten-year government bonds have risen by eight basis points, indicating greater perceived risk levels.
Markets had been optimistic of the prospect of a Modi victory because of his efforts in government to drive government spending in manufacturing, power, defence, and infrastructure, which has boosted activity in these industries more broadly.
Given that is currently unclear whether Modi will secure an overall majority, markets now fear that Modi will be forced to compromise on his agenda, which is widely seen as market and business-friendly.
The narrow margin of victory also raises questions about whether the new administration will be able to push through reforms in land and labour laws, which have been politically contentious and may therefore be unworkable should the BJP not possess a clear majority. These reforms are seen by many economists as crucial if India is to sustain its rapid economic growth.
Harsh Agarwal, a Mumbai-based hedge fund manager dealing in Indian equities, told Disruption Banking that “the fierce sell-off reaction in Indian markets is driven by two major factors.”
“Firstly, most analysts expected a clear victory for Modi’s BJP and therefore there was bullish momentum ahead of the elections. As it turns out, the Modi government will need continued support from its coalition partners which brings in political uncertainty. Traders are therefore cashing in profits on their stocks,” he said.
“Furthermore, one of the reasons for the weak election result might be softer growth in income levels for the rural economy and for the more economically disadvantaged members of the society, thereby further increasing the wealth divide,” Agarwal added.
“Market participants may now anticipate the government to “course correct” and boost spending towards the consumption side of the economy, at the cost of the industrial and infrastructure side. As a result, there is currently a significant rotation taking place in stock price behaviour today, from industrial-related stocks to those exposed to rural consumption.”
Rahul Aggarwal, a quantitative trader in Mumbai, previously said he was “bullish specifically on sectors such as railways, public sector undertakings, and manufacturing, where the government has shown keen interest in committing capital expenditure,” however this was based on the assumption that Modi was on course for a clear and decisive majority.
It now seems likely that these sectors will see less growth in the months and years ahead, with stocks related to rural consumption or agriculture posting stronger growth as the government seeks to refocus its priorities.
Indeed, Anubhav Sahu, equity research analyst at Moneycontrol Research in Mumbai, told Disruption Bankingthat “what is now ruled out is the prospect of a strong Modi government.”
“If the incumbent regime is successful in continuing from here, there will be inherent checks and balances which may force the government to allocate some funds to the rural economy and address the “K-shaped” economic recovery,” Sahu explained.
“Therefore, stocks related to the fast-moving consumer goods (FMCG), healthcare, and agricultural industries could outperform in the short-term. It also seems that now is a good time to diversify towards stocks that act as proxies for global growth, such as the chemicals sector, as inflation dynamics are on the mend worldwide and central banks are expected to start rate cuts soon.”
Nitin Mangal, Founder at Trudence Capital Advisors in Mumbai, agrees with this assessment and thinks the Modi agenda will have to change significantly. “It is very difficult to comment on how things will shape up in the coming days, but I can say with certainty that even if Modi is back in power, he will not be able to take bold decisions and will be more inclined towards populism. Many planned projects are going to halt.”
Some investors are more confident that Modi’s agenda will remain intact. Dong Chen, Chief Asia Strategist at Banque Pictet, told Bloomberg that “I still think the policy direction of Modi will likely stay, which should support India’s economy in the longer term. The valuations are expensive, but we will be watching for any correction closely as it may create some entry opportunities.”
Regardless of the specific direction Modi takes the Indian economy from here, it is important not to lose sight of the broader macroeconomic picture, which continues to look bright for India. The country is now the world’s fifth largest economy and continuing to grow rapidly. India’s National Stock Exchange (NSE) is now the world’s largest derivatives exchange by number of contracts traded.
Earlier this year, the Indian stock market briefly overtook Hong Kong’s as the fourth biggest equity market in the world, with more and more international hedge funds seeking exposure to Indian markets.
While these election results have undoubtedly come as a shock – hence the volatility on India’s equity, bond, and rupee markets – it is likely that Indian markets will continue to be attractive for international financiers in the years ahead.
Author: Harry Clynch
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