india

Updated: Dec 10, 2018 09:30 IST

Indian assets are likely to drop on Monday as exit polls showed Prime Minister Narendra Modi’s party is set for tight electoral contests in key states before general elections in 2019.

Six major exit polls showed Modi’s Bharatiya Janata Party (BJP) and opposition Congress neck-and-neck in Madhya Pradesh and Chhattisgarh, which are considered BJP strongholds. Results are due on December 11. Also weighing on investors is the prospect of higher oil prices after producer nations delivered a bigger-than-expected production cut.

Key insights

Madhya Pradesh, Chhattisgarh and Rajasthan contributed significantly to Modi’s landslide victory in 2014 and setbacks there may make foreign investors cautious of the risks to political stability in India. A better result for the Congress will be a morale booster for the main opposition party and its president Rahul Gandhi ahead of Lok Sabha elections expected in April.

Investor confidence in Indian assets only recently bounced back as crude oil prices slid and the Federal Reserve struck a more dovish tone. November saw the best rupee gains in nearly seven years, while local stocks saw their best month since July.

Markets

The rupee declined in offshore trading after the exit polls were released on Friday, with one month dollar-rupee contracts rising as much as 1.1 percent in New York trading. They were down 0.1 percent as of 9:19 am in Hong Kong Monday. Futures on the Nifty 50 Index dropped as much as 1.4 percent in the first minutes of trading.

A recent resurgence in risk-taking had seen investors buy net shares worth $868 million in November after three months of selling. They also bought $889 million worth of rupee bonds last month after avoiding the debt for most of the year.

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The BJP is trying to win a fourth term in key races in Madhya Pradesh and Chhattisgarh and a second in Rajasthan. While the first two are close, most polls indicated the Congress would wrest power from the BJP in Rajasthan. The Telangana Rashtra Samithi is expected to retain power in the southern state of Telangana while one exit poll predicted the Congress and a regional party are in a tight race for the northeastern state of Mizoram.

Exit polls in India haven’t always been correct. They were indecisive for the state of Uttar Pradesh that Modi’s party ended up sweeping and were also split on Bihar, which the BJP lost.

Strategic views

TCG Advisory Pvt. Ltd. ( Chakri Lokapriya, chief investment officer)

The exit polls show a tilt of power toward the opposition. However, outside the initial volatility, we don’t see a meaningful impact on returns for investors over the year. Among macro fundamentals, crude at $60-$70 bodes well for India. But we see margin pressure and some impact on profits for corporates in the quarter as the pace of crude’s decline has caused volatility and disrupted hedges at a higher level.

Star Union Dai-Ichi Life Insurance ( Ram Kamal Samanta, vice president for investment)

The exit polls may lead to a knee-jerk jump in bond yields on Monday. Bonds have already rallied a lot so there is scope for profit taking. The OPEC agreement is also negative as that may lead to a rise in oil prices, widening the current-account deficit. Any adverse results may lead to the government ramping up spending ahead of general elections.

Joindre Capital Services ( Avinash Gorakshakar, head of research)

If it’s a 2-1 victory for BJP, then expect a strong rebound in markets to around 10,800 to 10,900 levels. Conversely, if it’s a 1-2 defeat then expect a sell-off to levels below 10,500 to 10,450. In case of a defeat in all three key states, a dip in the Nifty to 10,200 also looks possible, he said. Investors will get a good window of opportunity in the next three to four months to accumulate good quality stocks.

Edelweiss Securities ( Madhavi Arora, economist)

Markets are likely to remain on edge ahead of the state elections result. The surprise break through in the OPEC+ production cut has lent renewed support to Brent, which would weigh on the rupee and India bonds. The fate of the Brexit parliamentary vote on Dec. 11 would add another layer of uncertainty in the foreign-exchange space globally. While the outcome of India’s state elections would decide near-term direction of the rupee, we remain watchful of unwinding of global events.

IDBI Capital Market Services Ltd. ( AK Prabhakar, head of research)

General elections are just six months away. Investors will begin fearing that competition is very close and if the opposition unites, it will not be a cakewalk for the ruling party, he said. If that is the case, market will correct. Market might correct 8 percent to 10 percent in the next two to three months. Correction will be across sectors and the most impacted will be non-bank financial companies, infrastructure and oil marketing companies.