Indian elections are always a spellbinding spectacle. Given that India is a multi-party democracy, predicting the winner and loser is a challenging game. However, there is no shortage of psephologists, both professional and amateur, who engage in this exercise.
Since 1991, the results have been linked to economic programs. As a result, stock market players showed more interest than before.
Having participated in elections since 1977 – as an observer, voter (1983) and then as a market participant (1991) – I had the opportunity to observe how markets behaved during the election period preceding the formation of a novel government.
Since 1991, two main forces (Congress and the Bharatiya Janata Party) have been in power for most of the time, except for a brief two-year period in the delayed 1990s. While the Congress was in power for 15 years, the BJP was in power for a little longer – 16 years, and the Third Front had a miniature period of 2 years.
Let’s look at market movements during each election, dating back to 1991.
1991: Future prime ministerial candidate Rajiv Gandhi is assassinated in the first phase, so the elections had to be postponed and held in two further phases. There was uncertainty everywhere, but markets held steady and rose just before results day as they felt a stable government would be formed. The Congress was the largest party with 244 seats, followed by the BJP with 120 seats. This government lasted a full term of 5 years and during this period economic liberalization was born.
1996: Although investors expected the Congress to return to power, markets indicated otherwise since the liberalization efforts initiated by Manmohan Singh and Narasimha Rao began to bear fruit. The markets won once again. The BJP was the largest party with 161 seats, the Congress dropped to 2nd place with 140 seats, while the Third Front had around 78 seats. It was a hung parliament, which was reflected in subsequent market movements.
1998: While investors were confused, prices began an upward trend in the hope that the BJP would emerge as the largest party by far, and it did. The BJP improved its tally and achieved 182 seats while the Congress had to settle for 141. This government would also fall within 13 months as there was no majority even among the allies, but the market expected good governance under the BJP, hence the buoyancy.
1999: Betrayed by its allies and reeling under American sanctions, the country took part in elections between September and October 1999. While investors once again expected a hung parliament, the country elected the BJP, which had the same number of seats but more allies, could form a stable government. Markets sensed this possibility and gained momentum even before the government was formed, which took action shortly thereafter.
2004: This was a landmark election in many respects. The government was riding high on the tail of the India Shining campaign while the opposition was discredited and tender. The economy was doing well and the Prime Minister was universally popular, so he postponed the elections by 6 months. Opinion polls had NDA around 340-350 seats and punters (including me) had built huge long positions in anticipation of huge gains on results day. However, the markets had their own opinion. From the first phase on April 20, markets experienced selling pressure and quotations fell steadily until results day. It was a shock. The Congress won, though with a very slim margin of just 7 seats, while the BJP won 138 seats. But the damage was done. The markets crashed sharply, down about 16% in one day, as everyone was over-leveraged and had to sell in panic. But the market had already spoken before the first round. None of us saw this coming.
2009: This election took place shortly after the global financial crisis and the economy was limping back to normal. Investors thought we would have a hung parliament like in the 1990s because economic conditions were terrible. However, the market showed resilience ahead of the polls and when the results were announced over the weekend, the Congress was ahead with 206 seats while the BJP was second with 116 seats. Markets surged 16% in one day as bears sought cover; once again, investors did not notice the signals coming from the market.
2014: Even though the challenger (Narendra Modi) was the market favorite, there were still doubts among punters whether the BJP would be able to win a majority on its own. However, once again the markets showed the way, leading very steadily into the various phases, then taking off just before the final phase and there was no turning back, breaking many records in the process.
2019: The election campaign started seemingly calmly and the challenger (Congress) had a chance, but the Balakot incident significantly changed the scales in favor of the BJP. The momentum has progressed to 5 of 7 phases. There were some tense moments in the market in the meantime, but the market recovered in the last phase, giving the BJP a resounding victory of 303 seats – the highest ever in 35 years.
2024: This time we also have 7 phases. All polls agree that the BJP alone is likely to win a minimum of 330 seats. Players also place bets with high leverage. No one expects anything less than the 303 seats the BJP won last time. In fact, players have no stop-loss. While Sensex, Nifty and Bank Nifty were fluctuating in some range till the end of phase 5, Sensex and Nifty suddenly surged while Bank Nifty lagged. It is significant to note that the financial sector’s share in Nifty is around 34%. Over the last 25 years, Bank Nifty has better indicated the direction of the markets. Interestingly, even in the case of Nifty, out of the top 25 stocks with a combined weightage of almost 80%, only 4 stocks hit all-time highs last week, clearly indicating that ‘astute financiers’ are still not enthused about the latest irrational exuberance.
The market has always been right in eight elections since 1991. The current price action suggests that the market is dangerously bullish due to high leverage and reluctance to consider any other alternative except for the BJP winning over 330 seats. The market tells us otherwise. Get ready to hit on June 4th.
(The author is an independent market analyst)
