Indian Stocks Plummet as Modi’s Majority Hopes Fade

June 5, 2024
Paul Svensen

Indian stocks experienced their worst day in four years as vote counting in the country’s election suggested Prime Minister Narendra Modi’s dream of a landslide victory is at risk. This has raised doubts about his ability to push through more aggressive economic reforms.

Key Takeaways

Indian stocks saw their worst daily drop since 2020.
Sensex and Nifty 50 indexes each closed down by nearly 6%.
Modi’s Bharatiya Janata Party (BJP) is unlikely to secure a majority on its own.
Foreign investors sold a record amount of Indian shares.
Market volatility is expected to continue in the short term.

Market Reaction

Indian stocks plunged on Tuesday as vote counting in the country’s election suggested Prime Minister Narendra Modi’s dream of a landslide victory is at risk. The benchmark Sensex index and the broader Nifty 50 index each closed down by nearly 6%, marking the worst daily drop for Indian stocks since 2020. This came just 24 hours after both indexes hit record highs, driven by weekend exit polls predicting a resounding victory for Modi.

Election Results and Economic Implications

Modi’s Bharatiya Janata Party (BJP) was aiming for a 400-seat supermajority in the 543-seat lower house of parliament. However, preliminary results show the opposition Congress party is performing better than expected. A party or coalition needs 272 seats to form a government. In the last election in 2019, the BJP won 303 seats. If the final results confirm that Modi has underperformed, key economic reforms may be delayed.

Investor Sentiment

Foreign portfolio investors (FPIs) have been cautious on Indian stocks since the commencement of the Lok Sabha polls in April. They have been net sellers, withdrawing nearly Rs 37,700 crore, including Tuesday’s net selling figure of Rs 12,436 crore. Market dealers suggest that any significant change in the investment patterns of foreign funds in India could have a substantial impact on the stock market.

Market Volatility

Prashanth Tapse, Senior VP (Research) at Mehta Equities, anticipates that the markets will continue to experience short-term volatility. Defensive sectors such as FMCG, Telecom, and Pharma, which are less influenced by government policies, may be a prudent focus for market participants. The upcoming budget presentation and the release of quarterly earnings reports are expected to be significant events that could impact market trends.

Long-Term Outlook

Despite the immediate market reaction, the long-term outlook remains positive. Historical data suggests that markets tend to recover and even thrive in the longer term. Investors are advised to focus on long-term strategies, such as maintaining a diversified portfolio and avoiding panic selling. Strong fundamentals and resilience against political changes are crucial for navigating market volatility.

Sectoral Impact

Sectors like infrastructure, defense, and capital goods are expected to benefit from policy continuity and government focus on development projects. Large-cap stocks are preferred for their stability and resilience against economic fluctuations.

Conclusion

While the immediate market reaction to the election results has been volatile, the overall long-term outlook remains positive, particularly if policy continuity is maintained. Investors are encouraged to stay informed, focus on fundamentals, and be prepared for short-term fluctuations.