Surprise, surprise! Markets crash on election results, investors panic

Supporters of the Bharatiya Janata Party (BJP) react as they watch a giant screen telecasting election results live on June 04, 2024 in Bengaluru, India. Image: Abhishek Chinnappa/Getty Images

Markets around the world hate surprises, and an uncertain election outcome is bound to inject fear and nervousness into them. What seemed like a smooth ride to gain a majority by the Bharatiya Janta Party-led NDA (National Democratic Alliance) in the Lok Sabha, turned out to be a tough contest, with votes being counted on Tuesday. Markets appeared to be on a slippery slope, as both benchmark indices kept skidding, with counting trends about seat sharing emerging throughout the day.

During the day, the Sensex lost 6,234.35 points or 8.15 percent. It finally closed at 7,2079.05, falling 4,389.73 points or 5.74 percent. The Nifty lost 1,982.45 points or 8.52 percent during the day. At closing, the 50-share index was at 21,884.50, down 1,379.40 points or 5.93 percent on Tuesday. It is one of the sharpest single-day falls for both indices; the markets had tanked 13 percent on March 23, 2020, reacting to the nationwide lockdown to combat the spread of Covid-19.

Contrary to what exit polls had indicated, vote counting trends showed BJP possibly leaning towards NDA partners to return to power for a third time, which made investors anxious. Panic selling led to massive loss of market capitalisation, of around Rs 30 lakh crore, in just a day. Following the last phase of elections, all exit polls had estimated that the BJP-led NDA was all set to secure a strong majority, with more seats than it won in 2019. The markets had already factored in a third term of Prime Minister Narendra Modi, while corporates were cheering for continuity of reforms, policies and business plans.

“Nifty tumbled to log its worst session in over four years, as vote counts from the nation's marathon elections indicated that the incumbent Bharatiya Janata Party might be reliant on alliance partners to return to power for a third time,” says Deepak Jasani, head of retail research, HDFC Securities.

This Lok Sabha Election was essentially a contest between the BJP-led NDA, which is seeking a third consecutive term, and a combined bloc of Opposition parties, called the Indian National Developmental Inclusive Alliance (INDIA), which includes the Congress. However, the changed circumstances and the lack of a thumping majority of either BJP alone or NDA sparked caution among investors.

“We see Narendra Modi returning as PM, but in changed circumstances,” says Seshadri Sen, head of research and strategist, Emkay Global Financial Services.

The ruling NDA is set to return with a slimmer majority than in 2019: Current trends indicate it could end up with 290-300 seats, comfortably ahead of the 272 majority mark. The bigger surprise is that the BJP, on its own, is set to miss the majority mark by a wide margin, with around 230-240 seats.

According to Sen, Modi is likely to return as PM for a third term. However, he will have to contend with changed circumstances; there may be greater demand to stimulate consumption in the economy from both, the BJP and allies. However, he feels that the broad pillars of India’s economic momentum are unlikely to change. The focus on manufacturing will continue, especially given its importance in job creation. There may be a subtle shift back towards consumption stimulus, but Sen thinks it would not be material.

“State budget deficits may worsen, but we see little risk to the consolidation of the Central fiscal deficit. The capex cycle may also slow down as the government pivots (slightly) to revenue expenditure spending, and corporates may get into a wait-and-watch mode for a few quarters. Finally, we think the unprecedented macro-financial stability will persist, with little risk of a collapse of the twin deficits or bank/corporate balance sheets,” he says. Sen expects a market derating in the short term, as the ‘risk-on’ India has gone up.

The India volatility index, or India VIX, also heated up to a nine-year high, indicating investors’ anxiety. India VIX rose 23.65 percent, to close at 25.89 on Tuesday. The India VIX, often referred to as a fear gauge or fear index, has an inverse correlation with rising markets. The current rise in the fear index indicates that investors are losing confidence in the markets. The India VIX had seen a sharp rise of about 116 percent in the first two weeks of May, indicating investors were getting increasingly nervous about a sharp correction in markets in at least the following 30 days.

Also read: Markets on a sugar rush as exit polls thrust Sensex, Nifty to record highs

 What’s the panic about?

Most exit polls had predicted that the BJP alone will comfortably cross the half-way mark in the lower house of Parliament (272 seats) and even improve on its 2019 tally of 303 seats, with polls pointing to potentially more than 330 seats for the party alone. The exit polls gave a range of 359-401 seats to the NDA.

Taking an average of all exit poll predictions, NDA was expected to win 370 seats (it had won 353 seats in 2019). Today’s Chanakya, the only agency that predicted the 2014 seats correctly, estimated 400 seats for the NDA. Meanwhile, the highly respected and eagerly awaited Axis My India Exit Poll (it had accurately predicted the 2019 outcome and has a track record of correctly predicting 64 of 69 polls to date) had placed the NDA in the higher range, with 400 seats (361-401).

Some of the large issues that this election was being contested on are unemployment, extension of welfare schemes, inflation, youth, women, farmers, poor and the minorities, and development. However, all this is nothing new. In India, typically, these are some of the focus areas most political parties piggyback on during elections, irrespective of which party is in power. Accordingly, the manifestos of the major political parties in 2024 were also centred around these issues.

“Market reforms like those related to land, agriculture, and labour are now off the table, in our view. Privatisation and asset monetisation are also at risk, which could drag government capex in the short term. Some political reforms like harmonising elections (which need deep constitutional change) are now also unlikely,” says Sen.

The BJP manifesto focussed on themes such as continuation of existing policies, India as a global manufacturing hub and adequate social support for the needy. Meanwhile, the Congress manifesto stressed on creation of jobs through a new economic policy and government-led employment, a legal guarantee for minimum support prices (MSPs) and cash transfers to the needy, education loan waivers and an increase in reservations.

“As BJP doesn’t have a simple majority of its own, the bargaining power shifts materially within the alliance. Most scenarios from here could be taken negatively by the market, compared to expectations from last week,” says Sunil Tirumalai, equity strategist, UBS.

While the general election mandate is for five years, state elections take place quite frequently in India, with two large states, Maharashtra and Uttar Pradesh, going to polls in the next three years. “So national policy thought process could change sooner than later. The stress in mass market consumption may come into focus for the government. While the overall focus on infrastructure and capex could continue, some fiscal room may need to be made for populist measures,” Tirumalai adds.