On election result day, Indian equities opened weak and saw panic selling throughout the morning. Although there was a brief recovery mid-session, another round of selling in the final session led to a massive drop, with the Index falling 1,379.40 points to close at 21,884.50.
This sell-off was widespread, affecting almost all sectors except for Fast-Moving Consumer Goods (FMCG), with Public Sector Unit (PSU) Banks and Energy stocks being the major underperformers.
The broader market, including Mid and Smallcap stocks, suffered even more, correcting over 7.8%. The Bombay Stock Exchange (BSE) saw over 700 companies hitting their lower circuits, highlighting the extent of the market’s pessimism. Paytm was among the notable companies affected.
Vaibhav Jain, Share.Market Research, PhonePe Wealth commented on the market’s reaction, attributing the dramatic swing to the unexpected election result. “Nifty50 has swung 1,900 points intraday today, all due to the lower-than-expected seats for the NDA government as compared to the exit poll predictions. This shock was not priced in, leading to today’s market crash,” said Jain.
Jain emphasized that market recovery is uncertain and largely dependent on the final election result. “Markets would prefer a clear majority government for policy continuity, which would be a positive signal. However, any deviation might delay recovery. Investors should view these dips as opportunities to build long-term positions in quality stocks.”
PSU stocks have risen exponentially over the last year or so on the back of favourable Government policies. Today we are seeing a correction because of uncertainty of the continuation of these policies. We need to wait for the results to take any call on any sector.Today, only FMCG sector is up. This is not surprising as it is a defensive sector, which generally does well when broader market is down.He added.
Potential Government Scenarios and Their Impact
The early trends suggest that the BJP might only secure 230-240 seats, a significant drop from 303 seats in 2019, necessitating reliance on alliance partners. The NDA is projected to win 285-300 seats, down from 353 in 2019, with significant losses in key states like Uttar Pradesh and Maharashtra. The opposition I.N.D.I.A alliance is performing better than expected, potentially securing 230-240 seats.Also Read: UBS remains ‘underweight’ on India, sees three emerging scenarios
According to UBS, there are three potential outcomes for the Indian government following the current election results. The most likely scenario is Modi continuing as Prime Minister but with increased reliance on alliance partners, which could result in less efficient governance. Another possibility is that the NDA forms the government with a new leader.
Alternatively, key BJP allies might switch sides, allowing the opposition I.N.D.I.A allianc e to take power, which could significantly alter policy directions.
Impact on Investment Outlook and Market Valuations
The market had not anticipated such a fragmented mandate, which challenges previous valuation assumptions based on political stability. The unexpected election result could delay key reforms, including agricultural subsidies, land reforms, and direct tax reforms. While infrastructure investments may continue, populist measures could increase, affecting fiscal consolidation.
According to UBS, the current scenario indicates a return to coalition politics, impacting policy certainty and market sentiment. Global brokerage firm Nomura echoed these sentiments, noting the election outcome has been a “clear disappointment,” urging market participants to wait for final results before making long-term investment decisions.
Also Read: India Inc. cautiously optimistic as BJP may fall short of majority
The Indian stock market’s dramatic fall reflects the uncertainty and potential instability brought by the unexpected election results. Investors and market analysts are closely watching the unfolding political landscape to gauge future market movements. Amidst the volatility, experts advise focusing on long-term investments in quality stocks, despite the short-term turmoil.
