Assembly poll results Market reaction knee-jerk; Sensex, Nifty shed over 1 pc

The benchmark index, BSE Sensex, crashed more than 600 points in early trading on Monday, down nearly 1.5 percent, while the NSE Nifty opened 1.2 percent or over 180 points lower in early trading. While the Sensex was in danger of giving up the 48k-level, the Nifty index was under 14,500 levels on opening.  The markets have been witnessing volatility as the country is in the middle of a second wave of coronavirus infections.

One of the factors that has impacted market sentiment may be the outcome of the assembly elections in the four states of West Bengal, Kerala, Tamil Nadu and Assam and the Union Territory of Puducherry.  The markets may be a tad disappointed with the BJP failing to dent the TMC prospects in West Bengal, considering that the BJP is the principal party in power at the Centre. Assam is the only state where the party has retained power.

When it comes to Tamil Nadu and West Bengal, there may be an impact on the Rajya Sabha composition owing to the wins by the DMK and the TMC in the two states, respectively. The NDA alliance at the centre will need a majority in the Rajya Sabha to ensure that key bills pertaining to speedy economic reforms are passed.

According to brokerage firm Nomura India, even though the BJP’s loss in West Bengal may be perceived as a referendum on the Centre, elections in the states are mostly influenced by local issues. However, it remains to be seen whether the defeat of the BJP in the state of West Bengal will have a bearing on the upcoming UP elections and the general elections in 2024.

Not more than a  knee-jerk reaction

The outcome of the assembly elections seem to have sent the markets into a knee-jerk reaction, as both the Nifty and Sensex shed significant points. But having said that, the markets may not be severely impacted over the short or medium term as a consequence of the results. However, it needs to be seen how the government at the Centre will view the setback in the states and whether the losses will prompt the government to slow down the pace of economic reforms.

Earlier, on Friday, the benchmarks crashed after a winning streak of four days with traders booking profits in the wake of the assembly election results that were announced on Sunday. The Sensex shed 984 points or nearly 2 per cent to close at 48,782 points and Nifty lost 264 points or 1.77 per cent to close at 14,631. On April 30, foreign institutional investors (FIIs) turned net sellers as they sold shares worth Rs 3456 crore. In fact, FIIs and foreign portfolio investors pulled out over Rs 3,800 crore from equities in April, making the month the first one when there have been outflows following six months of solid inflows.

While some experts note that election results in the five states will make an impact only on the sentiment front but not on the material front, it needs to be seen how the results will impact the manner in which both the states and the Centre will respond to the ongoing second surge in coronavirus cases.

Factors that may drive the markets

India reported 3.68 lakh fresh cases of Covid-19 on Sunday, taking the overall count to nearly two crore. The country also registered 3,417 new fatalities with nearly 700 of these coming from Maharashtra alone. Several states, including Punjab, Odisha, Karnataka and Goa, among others have imposed restrictions and lockdowns to contain the spread of the virus.

The pace of vaccinations may have an impact on the economy and the markets. If India is able to quickly vaccinate a major portion of its population, it is bound to re-energise the economy and the markets as well. At the moment, India is facing a shortage of vaccines even as daily case counts continue to rise across states. The country has opened up vaccination for all over 18 amid the short supply of jabs.

The other factor that analysts believe will impact the markets is the goods and services tax (GST). The state governments and the Centre collected Rs 1.41 trillion in GST in the month of April, which is a record. Markets are also likely to be impacted by fourth quarter earnings; five Nifty 50 firms are expected to announce their fourth quarter earnings in this week, which may also have a bearing on the markets.

Conclusion

The assembly election results in four states, including West Bengal, Kerala, Tamil Nadu and Assam and one Union Territory of Puducherry, may have given way to a knee-jerk reaction by the markets but won’t make any deep impact. The factors that may impact the markets include rising Covid cases, pace of vaccinations, lockdowns and earnings announcements for the fourth quarter. The election results may, to an extent, dictate how states handle the pandemic or the composition of the Rajya Sabha, instrumental in passing legislation pertaining to the economy, but by and large, they are not likely to dent the markets.