Reduced political and policy risks drive stock market surge after BJP's state election triumph

Investors cheer BJP's state election wins, anticipate clear mandate in 2024 elections

Sensex, Nifty scale fresh lifetime highs ahead of RBI policy decision

It's been a bull run on the stock exchanges on Monday. The better-than-expected showing by the Bharatiya Janata Party in the Assembly polls in Madhya Pradesh, Chattisgarh and Rajasthan has led to a joyous mood on the Dalal Street. These results raise hopes of a clear mandate to the BJP in the general elections in 2024, which should mean stability in the economic and financial policies, something investors will take comfort in.

The BSE Sensex gained more than 1,400 points (2 per cent) on Monday to hit a new life high of 68,918.22 in intra-day trading. The NSE Nifty50 index also surged more than 400 points (2 per cent) to hit a new high of 20,702.65. Midcap and smallcap indexes also surged more than 1 per cent.

The markets were already in a buoyant mood over the last few days in the backdrop of India's better-than-expected GDP growth of 7.6 per cent in the second quarter and a cooling inflation in the USA raising hopes of interest rate cuts in 2024. The assembly election results, where BJP won three of the four results announced on Sunday, has been further confidence boosting.

"State election outcome will lead to greater confidence on continuity of BJP government at the centre, which will drive markets higher," said Anjali Varma, analyst at Phillip Capital. 

Varma noted that the broking firm had already been positive on Indian equities since clarity emerged on US interest rates peaking after the release of October inflation numbers and that optimism was further enhanced post India's GDP data.

The election outcome "will ensure better state development (MP and Rajasthan amongst the largest states in India, BJP on firm footing in Gujarat and UP), continuity/ further boost in central/ state government policies, progress in economic growth," she said. 

The BJP's state election wins should allay market concerns over political risks, according to Sonal Varma, chief economist, India and Asia ex-Japan, Nomura Securities.

"As some investors were worried that a poor showing by BJP in the state elections would increase the risk of more fiscal populism, the actual results should calm such fears," said Varma.

She noted that state elections have not been a good leading indicator of general election results, but investors will most likely view these developments positively in anticipation of reduced policy and political risks into 2024. 

Congress' losses can impair its chances of providing strong leadership to the opposition INDIA coalition, felt Varma.

Over the last few years, India's equity markets have seen strong flows from domestic investors, either directly or via mutual funds. In October equity mutual funds attracted inflows of almost Rs 20,000 crore. Contributions via systematic investment plans (SIP) have touched nearly Rs 17,000 crore.

Foreign fund flows have also picked up this year, compared with last year's outflows. As of December 1, foreign portfolio investors had pumped in close to Rs 1.15 lakh crore in India's equity market in 2023, according to NSDL data. They had been net sellers to the tune of Rs 11,119 crore last year. Certainty in political and economic policies should augur well for these flows. 

Kapil Gupta of Nuvama Institutional Equities says market will cheer the electoral outcome as it abates political risk. 

"The ruling party's strong performance provides it political capital to pursue the infrastructure push. Concurrently, it lowers the need for a populist turn," said Gupta. 

Pranav Haridasan, MD and CEO of Axis Securities says markets are now assigning a greater probability of continuation of existing government policies beyond 2024 and decisive election mandates. 

"Near-term markets are likely to see strong interest, led by a rebound in industrial growth and a benign interest rate trajectory. Yesterday's events have lowered risk for investors in the short term and they can expect a good closing for the calendar year," said Haridasan.

Sanjeev Prasad, MD and co-head of Kotak Institutional Equities also said the BJP's victory in the state elections will further bolster the market's expectations of BJP retaining its majority in the Lok Sabha in the 2024 general elections. He feels markets may trade at "rich" valuations in the near-term with election-linked market volatility remaining low.

"The reduced election risk and growing expectations of an imminent rate cut cycle in the US may sustain the Indian market's rich valuations," said Prasad.

He pointed that most consumption, investment and outsourcing-linked stocks are trading at "rich" valuations, while stocks of financial companies continue to trade at attractive or reasonable valuations. 

Join our WhatsApp Channel to get the latest news, exclusives and videos on WhatsApp