CNBC’s Inside India newsletter: Will markets sink even if Modi wins?

This report comes from this week’s CNBC’s “Inside India” newsletter, which brings you timely, insightful news and market views on the emerging powerhouse and the big businesses that made it soar. Like what you see? You can register Here.

India will be counting its political winners and losers in the coming days after the final phase of voting for the General Elections concludes.

Separately, the stock market will give its verdict when markets open on Monday.

Although the counting of the votes will begin on June 4, the votes from the local media may come soon after the end of voting on Saturday.

Panic among investors over the results meant that India’s VIX index, the so-called benchmark of market fears, has risen more than 135% since April’s low.

Investors worry that the government will be held back from implementing major economic reforms without a major victory for Prime Minister Narendra Modi’s BJP.

With the BJP-led coalition winning around 350 seats – more than 60% – in the last Parliament, India went to the polls with markets expecting a record 400 seats.

The majority would allow Modi to make changes to the constitution and reform land acquisition and labor laws, which analysts say are crucial to accelerating India’s economic growth.

Traders pushed the NIFTY 50 index to an all-time high last week, closing above 22,967 points, hoping that the election results will be as expected.

“As the index reaches new highs, the market is increasingly pricing in the risk of a surprise negative loss for the BJP-led coalition,” Bank of America analysts said in a recent research note.

They suggest that the equity options market expects stocks to move – up or down – by 4.5% on the first trading day after the options close.

That could also suggest that reports of low voter turnout and close contests elsewhere, concerns that initially drove the India VIX, have been put aside.

“While the BJP’s pre-election talk of winning 400 seats was probably more political gimmick than real intent, it went into the polls with the largest single-party majority in nearly 40 years,” he said. Bradley Saunders, associate economist at Capital Economics. .

“Furthermore, the BJP did well in the state elections late last year. Looking at it that way, the BJP will have lost a lot of goodwill in a short period of time to not get another majority. of parliament.”

In a letter to clients, Saunders also pointed to data from the Electoral Commission, which shows that although turnout is lower than the 2014 and 2019 elections, it is “in line with historical averages .”

However, some equity experts point out that even a landslide victory for Modi’s BJP could damage the stock market. The old saying “buy the rumor, sell the news.”

“We see a short-term breach of the 23K target, but quick profit-taking brings it back below that level,” said Bernstein strategist Venugopal Garre.

“Strength was known to equity markets, that’s why we had a rally in Nov/Dec last year – playing too often on the same theme leads to irrational valuation results – so , we believe that the focus will return to the macro, wage growth, rationalization of values,” Garre added.

Temperatures are soaring as a heat wave sweeps across the country. A record heat wave has gripped Delhi and the northwest and central parts of the country, with temperatures hovering around 50 degrees Celsius (122 degrees Fahrenheit) throughout the week. The Delhi region also reported its first heat-related death of the year, Reuters reported citing local media.

S&P raises India’s independent outlook to positive. The credit rating agency said that the rapid growth of the country’s economy has a positive impact on its credit rating. Fitch Ratings also said that the recent transfer of $25 billion from the central bank to the government will reduce the budget deficit next year – a positive event if the deficit continues to decline through a consistent approach.

Kolkata Knight Riders win the IPL. Sunrisers Hyderabad did not stand a chance in the final match over the weekend. SRH were all out for 113 in the first innings, the lowest total ever in an IPL title match. Knight Riders chased an easy target with eight wickets to spare.

Indian stocks are down more than 2% this week. The decline reversed last week’s gains in the Nifty 50. The index is up 3.43% this year.

India’s 10-year government bond yields remained flat, with yields at 7% on a better-than-expected deficit reduction.

On CNBC TV this week, former emerging markets trader Mark Mobius said a BJP victory would make him the “biggest bull” in India. He also named the branches in which he is very strong.

Meanwhile, Gautam Chhaochharia, head of global markets for India at UBS, said foreign investors are “waiting and watching” ahead of India’s election results even though economic fundamentals look “strong very much.”

Voting begins next week, although exit polls will determine potential winners by the end of the week. India’s central bank is also set to discuss interest rates next Friday.