Market Soars to Record Highs on Election Optimism, But Could Face 20% Plunge if Results Shock

The Nifty-50 index reached a record high of 23,007.20 on Friday, with the Sensex also trading near its peak. This rise is fueled by expectations that the ruling BJP-led National Democratic Alliance (NDA) will stay in power. A strong dividend payout by the Reserve Bank of India has boosted confidence, as it helps reduce the fiscal deficit. This improved sentiment among foreign investors and strengthened the Indian Rupee. Additionally, strong GDP growth is expected, allowing the government to invest more in infrastructure and other development projects.

Possible Market Impact if Election Results Differ from Expectations

If the election results differ significantly from expectations and the ruling party fails to stay in power, the stock market could drop by 20%, according to Sunil Damania, Chief Investment Officer at MojoPMS. In this scenario, it might take up to six months for the market to stabilize and return to pre-election levels.

Deepak Jasani, Head of Retail Research at HDFC Securities, agrees that a surprise election outcome could cause a sharp market decline. He believes reforms might be delayed, and populist measures from various political parties could hurt market sentiment. There would be uncertainty about new reforms.

Bernstein’s India strategy report also notes that the government’s role in orderly capital expenditure is crucial. Therefore, an NDA return is favorable, while a change in government might lead to disorganized growth and structural challenges. However, if the opposition gains power, consumption could improve in the short term, but this might lead to higher inflation and poor fiscal discipline.

Return of Populism if NDA Doesn’t Form Government

Bernstein suggests that if the NDA fails to secure 270 seats and the BJP gets fewer than 240 seats, populism could return. This would likely result in a significant impact on infrastructure spending, with funds redirected to social initiatives. The private sector might be pushed to participate more in infrastructure projects, but only the most viable projects would proceed.

Bernstein also predicts a short-term decline in business sentiment, with potential tax breaks and subsidies for the poor funded by increased taxes on corporations and the wealthy. Foreign Direct Investment (FDI) could also decline.

Long-Term Market Outlook Remains Positive

Despite potential short-term volatility, Sunil Damania emphasizes that the long-term market outlook remains positive. He notes that historically, the market has been higher after elections, regardless of which party wins. Therefore, focusing on long-term gains is more important than short-term fluctuations.