How did the Indian stock market react to elections in the past?
Sensex and Nifty hit record highs post RBI's generous transfer to government. Historical data shows markets have mostly had muted reactions to election results.
India’s benchmark stock market indices Sensex and Nifty touched historic highs at close of trading Thursday, 75,418 and 22,967 respectively, driven by Wednesday’s announcement of a generous transfer by RBI to government that can boost the latter’s spending ability (and control the fiscal deficit).
Since the elections were announced on March 16 (a Saturday, so it makes sense to look at the previous Friday’s close), the Sensex has risen from 72643.42 to 75418.04, a gain of 3.82%.
How does this compare with previous election cycles?
Stock markets, by nature, are heavily influenced by domestic and international events. And considering the far-reaching consequences of Lok Sabha elections, they too are considered to have significant influence over the markets. But just how much impact can election results have on the Indian stock market?
To understand this, HT analysed historical markets data to understand how they reacted during the past eight Lok Sabha elections.
In the past, markets have more often than not have had muted response to results on the day of the counting itself. To be clear, on instances where the counting fell on a market holiday, the very next trading day was considered for this analysis. The 2004 and 2009 Lok Sabha elections are the only two instances since 1991 when the markets reacted strongly to an election result on the counting day itself, as can be seen from Chart 1. While the market crashed in 2004, it soared in 2009.
To be sure, apart from 2004, markets also saw a dip as results were announced in 2019. One explanation for this would be that the BJP-led NDA’s victory was already factored in by the markets and weakness in larger economic fundamentals led to investors booking profits as the results were announced, leading to a fall in market prices.
The crash in 2004 occurred on the back of the unexpected victory of Congress-led-UPA, defying expectations of most analysts. The markets went down further over the next few trading days as it became clear that the newly formed coalition government would be supported by left parties as well. It took the markets around six months to return to levels seen prior to the election cycle. To be sure, the 2004 elections are also the only instance in which markets saw a downfall during the election cycle. Election cycle here refers to the period between announcement of schedule for elections by the Election Commission and counting day.
However, the very next elections in 2009, in which the UPA retained power, saw the markets rallying during the election cycle as well as on the first trading day after results were declared. The boost in market sentiments during this period was also aided by India’s swift recovery from the 2008 financial crisis, driven largely by a fiscal stimulus announced by the government.
Market performance post elections
While the movement of markets on results day signal the immediate sentiments of the markets, the bigger impact on wealth of investors is their performance after the elections, and how stocks react to policies introduced by the new government. Out of the eight elections analysed by HT, in four, the markets declined a year from the declaration of results, as can be seen from chart 3.
To be sure, out of the four instances where markets saw a decline in the year after elections, three were during the 1996-99 period, which was marked by instability in Indian politics. Meanwhile, the decline in markets a year after the 2019 elections--the only other similar instance where markets dipped--was due to the Covid-19 pandemic, which resulted in the crash of stock markets across the world.
The bigger message from this analysis is that, apart from periods of extreme political instability or external factors such as the Covid-19 pandemic, the Indian markets have provided good returns to investors. The period after 1991 elections saw the highest such gains for investors as the PV Narasimha Rao-led government initiated the liberalisation of the country’s economy. Even after the 2004 elections, which saw the markets crashing right after results were declared, they rallied within a couple of quarters on the back of robust GDP growth and a rise in foreign investments.
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