Indian shares see worst fall in 4 years as Modi's likely weaker win leads to policy worries

Indian stock market fall

  Indian Shares See Worst Fall in Four Years Amid Election Uncertainty

Indian stocks experienced their most significant intraday drop since March 2020 on Tuesday, triggered by election results indicating a potentially weaker victory for Prime Minister Narendra Modi's alliance. This unexpected development has raised concerns about the future direction of economic policies.

As vote counting progressed, it became evident that Modi's Bharatiya Janata Party (BJP) might not secure a majority on its own in the 543-member lower house of parliament. The BJP would need to rely on its National Democratic Alliance (NDA) partners to form the government, leading to potential policy uncertainty. Modi's government has been known for its push towards investment-led growth, which has been a cornerstone of its economic strategy.

"The key question is whether the BJP can retain a single-party majority. If not, then would its coalition be able to deliver economic development, particularly infrastructure?" said Ken Peng, head of investment strategy, Asia, at Citi Global Wealth.

The NSE Nifty 50 index closed down 5.9% at 21,884.5 points, while the S&P BSE Sensex fell 5.7% to 72,079.05. Earlier in the day, both indexes dropped as much as 8.5%, marking their steepest intraday decline since the initial Covid-19 lockdowns.

The dramatic fall came after a surge to record highs on Monday, buoyed by exit polls predicting a decisive win for Modi's NDA. This optimism was swiftly dashed as actual vote counts painted a less certain picture, triggering a sell-off. Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, noted that the dependency on coalition partners might shift the upcoming NDA government's focus towards welfare rather than reforms in the July budget.

Market analysts at Emkay Global warned that Indian markets might now derate due to heightened risk perceptions. They suggested that challenging reforms, such as changes to land and labor policies and the privatization of state-run enterprises, might be shelved.

Foreign investors, who had poured a net $20.7 billion into Indian equities last year but pulled back ahead of the election, were anticipated to become buyers again if Modi's alliance secured a clear mandate. On Monday, they purchased shares worth a net 68.51 billion rupees ($824.4 million).

Despite the uncertainty, some investors remained optimistic. "In our view, the important thing is that the NDA returns to form the next government, which represents policy continuity," said Mike Sell, head of global emerging market equities at Alquity in London. "Whether they win by 20 or 120 impacts the amount of structural reform that can take place, but ultimately a win is a win."

The lack of clarity regarding the NDA's margin of victory led to heightened intraday volatility, the highest in 26 months. Selling by high-frequency traders exacerbated the drop, triggering margin calls. Senior technical analyst Rupak De from LKP Securities noted that the market correction was intensified by margin calls, as retail investors were carrying heavily leveraged positions.

Some saw the decline as a buying opportunity. Gary Tan, portfolio manager at Allspring Global Investments, stated, "Regardless of the final election count, the Indian economy will continue to benefit from longer-term tailwinds of favorable population demographics and ongoing geopolitical tensions between China and the U.S."

The rupee ended the day at 83.53 against the dollar, down 0.5%, marking its worst single-day fall in 16 months. Additionally, the benchmark 10-year bond yield rose by 12 basis points to 7.06%.

In summary, the election results have introduced a degree of uncertainty into the Indian markets, causing significant volatility and investor anxiety. However, the long-term growth prospects remain intact, supported by favorable demographics and strategic geopolitical positioning.