Shimon Peres, the charismatic former foreign affairs minister of Israel had once said, “We should use our imagination more than our memory." As India’s gargantuan national elections come to a conclusion, its financial markets are jittery, being held back by memories of surprises and shocks in the previous three general elections.

NSE’s volatility index (India Vix) has risen from around 17 in end-March to 28 currently. In the process, Indian markets have decoupled from other emerging markets in terms of volatility, analysts at Bank of America Merrill Lynch (BofA-ML) point out in a note to clients. The Nifty 500 index has corrected by about 5% from its peak in mid-April, around the time nation began voting, and the rupee-dollar rate has breached the 70 mark. Foreign institutional investors, who were strong buyers earlier in the year, have turned net sellers in recent trading sessions, and some domestic mutual funds are sitting with higher than usual cash levels.

But most of this is normal ahead of elections. “Federal elections have historically resulted in short term volatility. MSCI India has moved 11-38% (trough to peak) in the 40 days around election results," analysts at BofA-ML wrote in a note to clients earlier this month.

If anything, there is a sense of cautious optimism on the Street about a return of the Bharatiya Janata Party led NDA government, albeit with a seat share that is slightly short of a clear majority. “Valuations (absolute and relative to emerging markets), flows (net $9.8 billion FII inflows in 2019 YTD) and our investor discussions suggest markets are factoring in a BJP-led NDA win," analysts at UBS Securities India Pvt. Ltd said in a note to clients on 16 May. “The markets are expecting a return of the NDA government, with a lower seat tally, but sufficient to cobble together a coalition," says the head of research at an institutional brokerage. Note also that the MSCI India index has risen about 3.5% since the air strikes against Pakistan on 26 February, while the MSCI Emerging Markets index has fallen 6.7% in the same period.

In this backdrop, if the NDA coalition falls well short of a majority, the markets can be expected to correct sharply, despite the caution among traders in recent weeks.

It is easy to see why markets are rooting for a return of the current ruling party. Markets love continuity and the NDA losing elections would mean growing uncertainty over policies. “If it’s BJP, then we know obviously what the policies and how the budget will be like. So, it’s not so difficult. The policies of the Congress may not be so different, but we don’t know what the budget will look like," said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies, LLP.

Fiscal policy is a key variable for the Indian markets, especially in the backdrop of a slowdown in consumption in recent months. Investors are hoping for a fiscal stimulus to get things going on the consumption side.

In fact, whatever the outcome of the elections, markets would move on to the more pressing macroeconomic issues.

As UBS’s analysts noted, “Nifty is trading at 20 times one year forward PE (on our top- down earnings forecast) and we think the risk-reward is unfavourable, looking beyond the immediate market moves next week. The reality check of fiscal slippage and/or a negative growth surprise, awaits markets post this binary event."

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