Market rally and poll expectations

Bull run reinforces the fact that the growth story of Indian economy is because of the bipartisan consensus on reforms, policy prudence

The BSE Sensex, India’s benchmark equity market index, crossed yet another new benchmark of 76,000 during intra-day trades on May 27. With election results just about a week away, is there a relation between the ongoing stock market bull run and some sort of perception about which way the results might go? Three points can be made vis-à-vis this question.

FILE PHOTO: A bird flies past a screen displaying the Sensex results on the facade of the Bombay Stock Exchange (BSE) building in Mumbai, February 1, 2023. REUTERS/Niharika Kulkarni/File Photo(REUTERS)

It is a given that equity markets will react positively to Bharatiya Janata Party’s (BJP) victory in the elections. Policy certainty, fiscal conservatism and the business-friendly credentials of the Narendra Modi regime are some of the factors behind this affinity between the markets and government. This means that there is at least a cohort of investors who see the BJP doing well in the elections. However, most experts also believe that markets have already factored in most of the premium which would accrue on account of a BJP victory. In that case, the recent rally in the markets could just be bulls exploiting the moment to drive up markets even more. The fact that the Prime Minister and other senior BJP leaders have been talking about a big rally in the markets after the results may have generated tailwinds for such an endeavour. To be sure, equity markets are always driven by some amount of speculation and short-term movements around elections are not uncommon. So, there is nothing untoward about such a rally.

The more important question, however, is whether such movements in equity markets are of long-term significance. An HT analysis of stock market movements during every election cycle — date of announcement of polls to election results — shows that markets have not seen abnormal movements during most elections and even when they have, they have reverted to the normal trend within a short span of time. This, once again, should not be a surprise.

Long-term movements in markets, unlike short-term volatilities, are driven more by economic fundamentals and tangible growth in incomes of companies listed on the bourses. On this front, the India story has only been of long-term growth. The overwhelming opinion is that it will continue to be like this going forward as well. It is important to acknowledge that the long-term growth story of the Indian economy is the result of a bipartisan consensus on reforms and policy prudence. Unless these two factors change (for the worse) after the results, the story will remain intact.