In its strategy report released on April 30, the brokerage explained that while positive election outcomes could spark a near-term reaction on Dalal Street, the market’s attention is rapidly shifting back to significant economic headwinds as the raging war between Iran and the US continues to spark a skyrocketing rally in oil prices.
What the exit polls predict
Exit polls across four states and one union territory indicate a maiden electoral win for the Bharatiya Janata Party (BJP) in West Bengal, while incumbents are likely to retain power in Tamil Nadu, Assam and Puducherry. Kerala also appears set for a regime change, with the Congress-led United Democratic Front (UDF) likely to unseat the Left Democratic Front (LDF), which has ruled the state for the last 10 years.”Markets may continue to debate more on oil versus macro-calculus, while giving a brief cheer for electoral stability,” Kotak Institutional Equities said in its report. With no major state elections scheduled until early 2027, the government is entering a 10-month “election-free corridor”. The brokerage expects policymakers to use this window to address a “weakening macro environment” characterized by elevated crude oil prices, a widening current account deficit (CAD), risks to food inflation from a sub-par monsoon and more.
“In our view, policymakers may focus on (1) rationalizing energy subsidies, (2) accelerating trade diversification, (3) finalizing the India-US Bilateral Trade Agreement and (4) accelerating certain slow-moving reforms,” Kotak added.
“We note that NDA has a strong majority in Rajya Sabha currently, with the recent defection of 7 AAP parliamentarians to BJP (which may get challenged in courts) further bolstering BJP’s strength in the Upper House. The likely increase in BJP’s strength in the respective state legislative assemblies in the recent elections may further increase the NDA’s strength in the next Rajya Sabha election cycles. Given their current strength in both Houses, the NDA has the requisite strength to pass most of its legislative agenda, other than Constitutional Amendments, that require two-third majority,” it further said.
Markets can react positively, but caution is warranted
While Indian markets are likely to react positively in the near term particularly if BJP’s projected victory in West Bengal is validated on May 4, Kotak advised caution. The brokerage highlighted that the trajectory of crude oil remains the “single largest short-term risk variable” for Indian stocks.
“The durability of any rally will be tested quickly,” Kotak warned. This comes as fresh escalations in the Iran war pushed oil prices to as high as $126 per barrel this week, before cooling off slightly. Brent crude futures were trading at around $111 per barrel on Friday morning, while WTI Crude futures were hovering around $105 per barrel. After comfortably falling below the $100 per barrel mark earlier in April, oil prices moved back above the crucial level later that month as fresh attacks near the Strait of Hormuz raised concerns about supply disruptions. This came after Brent saw a 50% rise in March alone.
US President Donald Trump said that the military blockade of Iranian ports could last for months. He may be planning a series of fresh military strikes to compel Iran to negotiate an end to the conflict, a US official told Reuters. Iran meanwhile said that it would respond with “long and painful strikes” on US positions if Washington renewed its strikes. Iranian Foreign Ministry spokesman Esmaeil Baghaei said on Thursday that it was not reasonable to expect quick results from US talks, according to the official IRNA news agency. “Expecting to reach a result in a short time, regardless of who the mediator is, in my opinion, is not very realistic,” he was quoted as saying.
Indian stock market tumbled on Thursday, with Sensex and Nifty cracking over 0.7% each, as oil prices soared to historic levels, the rupee plunged to an all-time low, along with other factors that dampened investor sentiment even after the exit polls. Markets have erased all gains recorded earlier in the week. Overall this week, Sensex declined more than 249 points and Nifty fell below 24,000.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)