Markets shrug off initial worries over NDA's Bihar election defeat

Image: Shailesh Andrade / Reuters

Indian shares opened sharply down on Monday, sliding 608.34 points but ended the day at 26,121.4, down 143.84 points

India’s stock markets appeared to have shrugged off the National Democratic Alliance’s defeat in the Bihar state assembly elections. The results, announced over the weekend, had heightened fears that the pace of reforms might slow down.

Market experts and investors said it was premature to assume that this election result would impact reforms in a substantial way. They said the government will have to “put its house in order first” before making a plea for foreign investment to flow into the country.

The Grand Alliance, secured a landslide victory with 178 seats, while the ruling NDA bagged just 58 seats and others seven.

Indian shares opened sharply down on Monday, sliding 608.34 points or 2.37 percent in early trade. But some of the losses were trimmed during the day and the benchmark 30-share Sensex finally closed down 143.84 points, or 0.55 percent at 26,121.4.

“We hope that this [Bihar elections] will only help accelerate government reforms and not slow them down,” said Gautam Trivedi, CEO of Religare Capital Markets. He said the government should focus on putting its house in order. “It is like, if you invite people over for dinner, you ensure that you first clean up and renovate the house.”

Trivedi feared that India’s stock markets are likely to remain flat over the next quarter, as foreign money will flow to China, where valuations are seen to be more attractive than in India. “I think incrementally, given the fact that valuations in China, for example, are much more at attractive than India; at this point I think investors are not really that hot about putting incrementally new money to work in India,” he told CNBC-TV18.

Analysts from DBS, in a note to clients, said: “On the political end, these [Bihar] results reaffirm that the centre-ruling party will find it challenging to break into crucial states if regional parties band together. Attention therefore is likely to swiftly revert to upcoming four state elections in 2016, followed by the key Uttar Pradesh polls in 2017. “Apart from the political calculus, worries are that these election results might derail the reform process and tilt the balance away from developmental reforms and encourage a populist agenda. But it is premature to assume that this will be the case,” they said in a report.

However it is clear that getting key legislations, especially land, labour and GST (Goods and Services Tax), past the winter parliament session (late-Nov) will be tougher than before, they added in a note to clients on Monday.

Saurabh Mukerjea, CEO of Institutional equities at Ambit Capital said that the Bihar elections would not “move the needle on reforms”. “The government had no specific reform agenda prior to the Bihar elections,” he said. Mukherjea feared a further downside for the markets, with a risk the Sensex may fall to 22,000 levels, considering the weak corporate earnings in recent quarters.