NDTV ProfitBusiness NewsWhy the 'Modi rally' in stock markets may be a misnomer
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Why the 'Modi rally' in stock markets may be a misnomer

10 Dec 2013, 04:41 PM IST
NDTV Profit
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  1. Markets want a stable government and not a BJP or a Congress government. This can be explained by the market's reaction when the second UPA government came to power in May, 2009. The Congress had returned to power with larger number of seats. The Sensex jumped by over 2,000 points in a single session on hopes of a strong government at the centre.
  2. Global brokerage Espirito Santo says election results are over hyped. In the six months before national polls in 1991 (Congress came to power), 1996 (Third Front) and 2004 (Congress-led UPA), markets gained 40 per cent, 24 per cent and 30 per cent respectively. In 1998 (BJP-led NDA came to power), 1999 (NDA) and 2009 (UPA), markets lost 25 per cent, 18 per cent and 10 per cent six months before elections respectively.
  3. The poll results in the four states do not necessarily indicate a victory for the BJP in 2014. Bank of America Merrill Lynch says a) these states are traditionally BJP strong-holds; b) these four states account for just 13 per cent of the total Lok Sabha Seats.
  4. In 1999, Congress performed exceedingly well in the state elections, but the BJP came to power at the centre a few months later. Again, in 2003, BJP won three of these four states, but lost the 2004 elections. This could be because local factors play a more important role in state elections, Nomura says.
  5. Bank of America says the success of the recently formed Aam Aadmi party in Delhi has reinforced the split nature of Indian politics where the non-Congress, non-BJP regional parties are getting powerful.
  6. Markets tend to do well ahead of elections irrespective of who will win. In five of the last six elections, investors buying six months before elections and selling on the day before results would have seen positive returns of around 15 per cent, Bank of America says.
  7. The current rally coincides with a sharp recovery in the Indian rupee. RBI's new governor Raghuram Rajan took steps which led to over $30 billion in inflows in the last three months. Moreover, India's current account deficit has come down sharply. The finance minister has also promised not to breach India's fiscal deficit target of 4.8 per cent of GDP.
  8. This is a sentiment drive rally, hence may not sustain. Indian economy is growing at the slowest pace in a decade and there's still no confirmation of a bottoming out as evident by a contraction in core sector growth in October (first time since February). Compare this rally to that of January 2008 (when the Nifty made a historic high), when India's economy was growing at an enviable average growth of 9 per cent.
  9. It's not the prospect of Mr Modi's win in 2014, but a deluge of foreign investment that may be driving markets. FIIs have bought shares worth $18 billion, while local investors have sold a record $11.7 billion in 2013. If the US decides to taper its stimulus, FIIs may start pulling out some money and markets may fall.
  10. Markets' fixation with Mr Modi may be "wishful thinking," economist Abheek Barua says. India's problems are too deeply ingrained to be solved by one man or one party, he added. (Read more)
(With inputs from Reuters)
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