After experiencing a significant downturn on June 4 due to the Bharatiya Janata Party’s failure to secure a majority in the 2024 Lok Sabha elections, the Indian stock market is now expected to shift its attention to fundamental macroeconomic factors and the upcoming monetary policy meeting of the Reserve Bank of India (RBI).

The 2024 Lok Sabha election results caused substantial nervousness in the stock market, resulting in the worst crash in four years.

The markets had expected the BJP-led National Democratic Alliance (NDA) to win more than 300 seats. However, the results were worse than anticipated, and the BJP will now have to rely on the NDA alliance to form a government, unsettling investors.

On Tuesday, the Nifty 50 plunged 8.5 percent to an intraday low of 21,281.45, having opened at 23,179.50. The Sensex started trading at 76,285.78 and dropped 8.2 percent to reach 70,234.43.

By the end of the day, the Sensex had fallen 4,390 points, or 5.74 percent, to close at 72,079.05, while the Nifty 50 ended the day at 21,884.50, down 1,379 points, or 5.93 percent.

“Indian equities plummeted after vote counting trends indicated a lower seat count for the ruling NDA government. We’ve seen a spike in volatility, and India’s VIX exceeded the 31.5 level, putting further pressure on the market,” said Ajay Menon, MD & CEO, Broking & Distribution, Motilal Oswal Financial Services (MOFSL).

What is the market outlook for the coming days?

Amisha Vora, Chairperson & MD, Prabhudas Lilladher, suggests that the market is likely to lose the ‘Modi Premium,’ leading to corrections in PSU and infrastructure stocks.

“Once this turbulence subsides, the focus will shift to the core macroeconomic factors impacting India. Investors should prepare for short-term volatility, but the underlying fundamentals of India’s growth story remain robust,” Vora said.

Menon believes the broader market may turn volatile as sentiments are affected, but he expects the major trend of the Indian equity market to recover after the volatility diminishes over the next few days.

“We anticipate that the volatility surrounding the election outcome will diminish in the coming days, allowing the market to refocus on macroeconomic factors and fundamentals, which remain robust. Once the new government is in place, it will present its first full budget for FY25 within the next few weeks, emphasizing themes like capital expenditure, manufacturing, rural development, consumption, and credit lending. The rural and consumption sectors are expected to gain momentum with the onset and progress of a monsoon season that is predicted to be above normal this year,” said Menon.

Despite ongoing market volatility in the near term, Menon advises retail investors to view this correction as an opportunity to accumulate quality stocks in 3-4 tranches.

The narrative around government formation and the RBI’s monetary policy will dominate market discussions in the coming days.

What should be your trading strategy now?

Historically, stock markets tend to recover and thrive in the long term, despite initial volatility. For example, following the 2014 and 2019 elections, the Indian stock market experienced significant gains in the months after the election results.

“Investors should focus on long-term strategies, such as maintaining a diversified portfolio and avoiding panic selling. Strong fundamentals and resilience against political changes are crucial for navigating market volatility,” said Pradeep Gupta, Co-founder & Vice-chairman, Anand Rathi Group.

While the immediate market reaction to the election results has been volatile, Gupta believes the overall long-term outlook remains positive, especially if policy continuity is maintained.

“Investors are encouraged to stay informed, concentrate on fundamentals, and be prepared for short-term fluctuations,” he added.

Stock Markets’ Future Trajectory Depends on New Government’s Economic Policies

Experts said on Tuesday that the stock market’s future trajectory depends significantly on the new government’s economic policies, with factors such as GDP growth and global conditions playing crucial roles.

The BJP-led NDA is still working to form a government with the critical support of coalition partners. Markets are optimistic about the prospects of strong decision-making. However, experts caution investors to be prepared for volatility due to current valuations and recommend adopting a diversified approach.

The market’s future direction hinges on the new government’s economic policies, with GDP growth, inflation, and global conditions being key factors.

Since May 2014, a combination of political stability, promises of reforms, improving economic conditions, and supportive global factors like quantitative easing by developed markets fueled a strong rally in Indian stock markets. This rally has led to an increase of over three hundred lakh crore in investor wealth, reflecting growing confidence and participation.

Experts highlight that investors prefer certainty and policy continuity. India represents a strong long-term structural growth story.

Continuity or Change, Corporate India Speaks on the 2024 Poll Results

India Inc. is betting on policy continuity across sectors.

Industry leaders and economists note that India’s economy is projected to grow at 6.8% in FY25, surpassing other major global economies.

All eyes are on the new government to further boost the current growth momentum. A potential third term for the NDA government would ensure continuity in India’s socio-political and economic arena.

The country’s anticipated GDP growth from $3.5 trillion to $7 trillion by 2030 can be sustained without significant changes in circumstances.

Industry and economic experts believe that sustained economic expansion will enhance India’s appeal to global corporations and firmly establish its position as a prominent hub for global capacity centers and manufacturing facilities.

The Question Of FPIs

Meanwhile, the uncertainties surrounding Investments by foreign portfolio investors (FPI) in the Indian Equity markets have increased due to an unexpected Lok Sabha Election 2024 outcome.

FPI were net sellers worth ₹12,436.22 crore in the markets on Tuesday, suggested provisional data on the NSE leading to more than 5% fall in the n]benchmark Nifty-50 index and Sensex.

The Investments by Foreign Portfolio Investors (FPI) that turned net sellers of equities in the month on April 2024 are likely to remain uncertain in the near terms, say analysts.  

The NSDL data shows that while foreign portfolio investors sold ₹8671 crore worth of Equity in April, the intensity of their outflows increased during May.

The Foreign Portfolio investors were net sellers of ₹25,586 crore worth of equities in the month of May ‘2024.

There remains uncertainty around the US Federal Reserve’s interest rate cuts. The initial expectations were that the US Federal Reserve would start cutting rates in March 2024, but this has continued to get delayed.

A stronger dollar and higher treasury yields, with expectations of “higher for longer,” have meant that investments in emerging markets became unattractive for foreign portfolio investors.

Rakesh Parekh, MD and Co-Head, Portfolio Management Services, JM Financial Services Ltd, said, “Obviously, the way the ongoing election outcome is throwing a surprise will result in some introspection and re-focusing on Foreign Institutional Investors India equity allocation.

Parekh believes growth and investment would remain the focus of the nature of any government. In this context, the longer-term attraction of investing in India would remain high, and as a result, flows in the longer term would continue to be positive.

Aditya Sood – Fund Manager, InCred Asset Management, said, “Global emerging market allocations depend on various factors like geopolitical stability in a country and leadership continuity.” 

However, as per Sood, the stability of the currency is a function of the fiscal deficit, current account surplus/deficit, and inflation.

Since the election results are behind us, the focus of investors would shift to the formation of the government, the appointment of ministers, the glide path of fiscal prudence, and the upcoming budget, added Sood.