Markets

How the stock market took election outcome & RBI change on its stride

Both equity and debt markets seem to have taken the recent state election results and the change of guard at the Reserve Bank of India in their strides, with both markets moving positively post these two events last week.

The Congress party registered convincing victories in Chhattisgarh and Rajasthan and narrowly surpassed the BJP in Madhya Pradesh. The two other states of Telangana and Mizoram have seen victories of local parties.

The BJP has seen significant erosion in vote share in these states compared with that in the 2013 assembly elections and 2014 general elections. The loss in the three major states could raise concerns among market participants about the partys chances of getting a majority in the Lower House in the 2019 general elections.

These states had contributed significantly to BJPs victory in 2014 general elections. The strong showing of the Congress will make it more potent force and also see other opposition parties align with it.

However, it is possible that the BJP may have a stronger showing in the national elections due to continued high popularity of Prime Minister Narendra Modi and difference in relevant issues for voters between national and state elections. Also, vote shares for both parties were very close in Madhya Pradesh and Rajasthan.

Average crop prices over the past few years have remained stagnant, with MSPs growing at a CAGR of about 6 per cent while market prices increased at a much lower CAGR of about 2.5 per cent. The supply has been managed well by the government in spite of two draught years, which is also visible in low food inflation.

The market also seems to have not been impacted much by the sudden resignation of the RBI governor, who cited personal reasons. The difference between the government and RBI on several issues has persisted for some time. The market perhaps believes the change in guard may lead to relaxation in certain regulations for the banking sector like higher liquidity, relaxation of PCA framework and dilution of promoter ownership rules, as also a more liberal monetary policy.

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