Indian stocks see heightened volatility amid political uncertainty

June 05, 2024 (MLN): India’s stocks fluctuated on Wednesday as investors assessed Prime Minister Narendra Modi-led party’s ability to form a coalition government after failing to secure a majority on it own, as Bloomberg reported.

The benchmark NSE Nifty 50 Index oscillated between gains and losses after Tuesday’s rout that erased almost $400 billion in market value.

Although the Nifty rose as much as 1.1% at open, it later gave up most of its gains.

Modi’s Bharatiya Janata Party has vowed to retain power along with allies but investors worry that a weak coalition government may hinder tough economic reforms.

The uncertainty threatens to put a dent in the so-called “Modi premium” that has helped Indian equities beat peers for a decade.

“The election outcome is a near-term derating event for the markets, with most impact on recent winners” like public-sector stocks, select industrials and realty, Jefferies Financial Group Inc. strategists including Mahesh Nandurkar wrote in a note.

The “likelihood of welfare spending/populist announcements by the coalition government in the July budget, alongside forecast good monsoon rainfalls, favors the rural recovery theme.”

Investors await outcomes of meetings later on Wednesday by the BJP-led alliance and the opposition grouping to chart the next steps.

Meanwhile, the India VIX Index, a gauge of 30-day ahead implied swings, slumped more than 20% after surging to more than a two-year high Tuesday.

The rupee traded near a record low touched in April, after falling by the most in a year in the previous session. Bonds were little changed.

“We expect realized and implied volatility to ebb in the coming days from its level on June 4,” Morgan Stanley strategists led by Ridham Desai wrote in a note.

The ruling alliance has passed the halfway mark and is likely to form the next government, they wrote.

India’s stock market plunged on Tuesday as Modi’s ruling party failed to win a majority in national elections, a stunning result after exit polls showed he was on pace for a landslide victory.

The BJP won 240 of the 543 seats in the lower house of parliament, versus 303 seats secured in the 2019 election.

The Nifty tumbled as much as 8.5% at one point, coming close to hitting its first circuit limit since the Covid-era crash in March 2020.

The selloff echoed the 2004 elections, when the BJP’s unexpected defeat triggered a market crash.

Indian stocks will look past the uncertainty caused by elections as corporate earnings and the nation’s economic stories are still intact, Goldman Sachs Group Inc. strategists including Sunil Koul wrote in a note.

“We remain constructive on Indian equities and see this weakness as an opportunity to accumulate,” they said.

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