MUMBAI: A roller coaster day on Dalal Street saw the stock market swinging wildly in reaction to the Gujarat election results. Key indices recovered sharply after an early plunge on Monday, sending short-sellers scurrying for cover as BJP eked out a victory in Gujarat in what was considered a tightly-fought electoral battle.
The extent of the win, which was lower than what the exit polls predicted, kept a lid on stock gains. Benchmark indices ended almost 0.5% up after rising as much as 1.2%, recovering from an early slump. The stock gauges had dropped as much as 2.6% in opening trades after early counting showed a neck-and-neck contest between BJP and Congress.
But a late surge in BJP votes caused the markets to rebound as traders rushed to cover bearish bets. Sensex ended at 33,601.68, up 138.71points, or 0.41%, over the previous day. Nifty gained 55.50 points, or 0.54%, to end at 10,388.75. "We are not surprised by the market's muted reaction because the exit polls had predicted a stronger victory for the BJP in the state of Gujarat," said Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities.
"From the market's perspective it still is a good outcome." Analysts said if the Congress had won the elections, the market would have crashed and opened the floodgates for heightened bouts of uncertainty in 2018. The Volatility Index — a measure of traders' perception of near-term risk in the market, dropped 12.22% to close at 13.11 after the election results.
The index had fallen as much as 14% following the market rebound after soaring by 22% in opening trades in response to Congress' strong show earlier. A lot will now hinge on the government's actions to revive the economy, weighed down by lack of investments. Investors are hoping the government does not resort to populist measures as renewed worries about inflationary pressures, which have caused the bond yields to rise of late, have kept the market on the edge.
Fund managers said the nature of the government's measures to boost the economy will also be crucial with the market fretting about the possibility of a widening fiscal deficit.
"The market will not be too worried even if the government indulges in minor populism. What will be more important is speedier execution of projects," said Mahesh Patil, chief investment officer—equities, Birla Sun Life Mutual Fund. Prasad said the government could turn its attention to reviving the rural economy.
"It will increase focus on the rural economy with likely additional spending on rural infrastructure such as electricity, roads and water," he said. Citi said the government could outline its policy for the rural areas, in its Union Budget on February 01.
"A detailed post-poll analysis of the vote share in different segments would indicate how significant the rural distress is (BJP seems to have done worse in rural Gujarat) and whether it needs urgent policy intervention," said Samiran Chakraborty, Citi's chief economist, in a client note. On Monday, foreigners extended their selling spree in Indian stocks, pulling `432 crore out of the market. So far in December, they have been sellers of Rs 3,387 crore.
Their selling has been absorbed by domestic flows. Domestic institutions were buyers of `1,077 crore on Monday. Fund managers and brokers said a revival in economic growth will be crucial as some investors are losing patience on India due to concerns over lofty share valuations. So far in 2017, the Sensex and Nifty have gained 26-27% each as against the MSCI Emerging Markets index's rise of 29.8%. India is one of the most expensive among emerging markets, with Nifty trading at 16.7 times FY19 estimated earnings compared to 12.1times of the MSCI Emerging Markets index.
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