What the assembly election 2018 results mean for the markets

Financial markets will undoubtedly take note of the results of 2018 assembly elections in five states and exhibit some volatility. However, they are unlikely to change direction purely on the basis of which major political party or coalition emerges the winner.

Markets would watch the action at the central bank more closely after Reserve Bank of India (RBI) governor Urjit Patel resigned with immediate effect citing “personal reasons”. Indication on continuity of the policy framework and direction will be most important, along with the choice of his replacement. The watchword with regards to the latter will be “credibility”.

As long as uncertainty prevails over how the RBI will function in the future, markets may underperform global counterparts. Will they, however, decide to chart a divergent path? Not likely. Even if we look at the movement in the equity markets today—a day loaded with political activity and risks associated with state election outcomes—the indices moved largely in-line with the world. A sharp recovery in the Dow Jones Industrial Average Index in the US overnight helped put a floor to the market with traders most likely using the early weakness to cover shorts.

The sharp gains that followed were largely in line with the European markets. In fact, Indian equities have been outperforming in the recent past, seemed relatively weighed down. The NSE-50 Index (Nifty) closed the session up 0.58% while European indices were almost a percent up.

So, while the uncertainty on the political front and the developments at RBI did bother the markets, the direction was clearly dictated by global factors. After all, the largest investors in equities operate in the US and sentiment swings there are bound to be felt here.

While we would like to give ourselves much importance, fact is, that the direction of equities here, even in the upcoming election year, will largely track global markets. Will local factors cause some wild swings along this path? Very likely.

But let’s also understand if much more can happen from now till elections to shake the applecart too much.

While the final votes are still being counted, the verdict of the recent state polls in Madhya Pradesh, Rajasthan and Chhattisgarh points to a clear resurgence for the Congress party. It will also exert pressure on the ruling Bharatiya Janata Party (BJP) to up the ante by scripting a narrative that will help them win back the disgruntled sections of the populace—farmers being one such important vote bloc—in the run-up to the assembly elections in early 2019.

Will the government be able to suddenly accelerate execution on any of the key issues like farmer incomes and jobs? Unlikely. But what they can definitely do is to start announcing schemes and rolling out plans aimed at addressing the concerns of the sections that voted against them. The ruling party will want to be seen as taking steps to address the key issues in order to soothe the frayed nerves.

Let us step back and assess what can go wrong for the markets. The present government has not seen any less controversies than its preceding regimes. And while decision taking has been on the front foot, there have been many corrective steps taken thereafter (in the case of GST or IBC, for instance). In previous regimes, the speed of decision-making was much slower, but the outcomes of actions were better projected. Also, broadly, the direction of policy has remained mostly the same.

That leaves the market with little to be concerned about.