The next key battle the market will watch out for will be in Congress-ruled Karnataka
The wild 1,200-point swing in the benchmark Sensex on Monday suggests elections will be one of the most important drivers and a source of high volatility for the markets in 2018.
At least eight states will go to polls next year, each of whom will be closely tracked by the markets to get a hint as to what could be in store for the all-important general elections in 2019, say equity market experts.
The 30-share blue-chip index tanked 867 points (2.6 per cent) on opening as early trends showed Rahul Gandhi-led Congress ahead of the ruling Bharatiya Janata Party (BJP) in Gujarat - a state it has governed for 22 years.
While the election calendar for next year starts in February, the next key battle the market will watch out for will be in Congress-ruled Karnataka.
Key BJP-ruled states such as Madhya Pradesh, Rajasthan and Chhattisgarh go to polls less than six months ahead of the national elections.
“The election calendar is getting thicker - usually a source of volatility,” said Ridham Desai, equity strategist, Morgan Stanley India, highlighting that low political volatility coincides with strong equity market performance.
“Any deviation in the outcomes of several state elections in 2018 may raise concerns about India’s political outlook and outcome of the general elections in 2019,” said Sanjeev Prasad, co-head, Kotak Institutional Equities.
Experts say the market is more bullish on the BJP as it will ensure continuity in policymaking.
Also, a good showing in state elections will help the ruling party strengthen its numbers in the Rajya Sabha, which will allow it to push ahead with future reforms, which require the consent of both the Lower and Upper Houses.
The eight states that go into elections next year and Gujarat and Himachal Pradesh that just went to polls account for 59 seats in the Rajya Sabha, nearly a fourth of the total seats.
These states also account for nearly a fourth of India’s population.
“As the 2019 general elections get closer, state elections are likely to get more market attention,” said Neelkanth Mishra, equity strategist, Credit Suisse India.
“The direct economic implications of those (state elections) would be limited particularly, after the final full Budget is presented in early February 2018. But changes in market sentiment could drive volatility.”
Bank of Amercia Merrill Lynch (BofAML) has elections as one of the top themes for 2018, along with global macro data and earnings growth.
The brokerage says the markets will be keenly watching if the government increases social spending ahead of voting.
“The current government is also likely to consider some form of increased social expenditure ahead of the 2019 elections.
"While many factors drive electoral victories, it is interesting to note that high fiscal deficits have generally coincided with the re-election of incumbent governments in India,” said Sanjay Mookim, equity strategist, BofAML India.
Kaushik Das, chief economist, Deutsche Bank India, said the economy on all occasions, barring 2008 when the global financial crisis happened, had seen a pick-up ahead of general elections.
“Growth momentum generally improves in the year prior to the elections, a trend which is likely to play out in this cycle as well,” he said.
Photograph: Danish Siddiqui/Reuters