How markets are likely to react to Lok Sabha results. A look at all possible scenarios

Pollsters and political analysts are divided on the possible outcomes of the upcoming Lok Sabha elections, with concerns about lower voter turnout and apathy posing risks for Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP). The six-week-long national election is in its final phase, with voting concluding on Saturday. The shadow betting market, tracked by traders for cues, predicts the BJP will win close to 300 seats this time, about the same as in 2019.

Still, the Indian stock market is keenly awaiting the counting and verdict, scheduled for June 4. Here’s a look at three possible Lok Sabha election outcomes and how markets could react to them.

BJP wins with higher seats than 2019

If the BJP wins a stronger majority than in 2019, equity markets are expected to rally in anticipation of growth-supportive economic policies, such as increased infrastructure spending and a push for the manufacturing sector. Rajesh Bhatia, chief investment officer of ITI Mutual Fund, predicts a positive market response in this scenario.

Abhishek Goenka, founder of IFA Global, a forex consultancy and asset management firm, expects benchmark indices S&P Sensex and NSE Nifty 50 to rally by 4-5 per cent, according to Reuters. The rupee could appreciate to around 82.80 against the dollar from 83.32 at the close on Thursday, while the benchmark bond yield may dip to 6.9-6.92 per cent from near seven per cent, according to VRC Reddy, treasury head at Karur Vysya Bank.

PM Modi’s return is seen as a positive by the market, indicating political stability and policy continuity, said James Thom, Senior Investment Director of Asian Equities at abrdn in Singapore.

BJP holds on to power but wins fewer seats

If the BJP and its allies win fewer seats than in 2019 but still secure more than the 272 seats needed to form a government, markets may experience short-term volatility but are expected to settle quickly.

Gaurav Dua, Head of Capital Market Strategy at Sharekhan, notes that the market has already adjusted to the possibility of a lower margin of victory for the BJP and its allies. Umeshkumar Mehta, chief investment officer at Samco Asset Management, believes a seat count below 300 for the current government will not significantly alter the market’s trajectory.

Opposition-led coalition government

A surprise BJP loss and the possibility of a coalition government led by Congress could lead to a sell-off in markets until the new government’s policies become clear. Mittul Kalawadia, senior fund manager of Equity at ICICI Prudential Mutual Fund, highlights the market’s preference for continuity, suggesting that any change in government could lead to a knee-jerk reaction.

Goenka from IFA Global predicts an immediate fall of up to 10 per cent in benchmark stock market indices in such a scenario, while Dua from Sharekhan warns of a potential 15-20 per cent decline. Anindya Banerjee, head of Foreign Exchange Research at Kotak Securities, adds that the central bank may intervene to stem a decline in the rupee, and foreign outflows in bonds could lead to an immediate rise of 10-15 basis points in yields.

Although there are several polls suggesting a strong win for the BJP, some state of volatility may be expected until the results are officially announced.

The possibilities of the upcoming Lok Sabha elections are varied and carry significant implications for the Indian share market. Each scenario will elicit different market reactions, with potential impacts on equity indices, the rupee, and bond yields.

An unstable government will send investors into a tizzy. But if BJP leaders are to be believed there is little reason to worry. Finance Minister Nirmala Sitharaman has predicted a solid bull market after the 4 June results. The countdown has begun.

With inputs from Reuters