TMC-UPA split: How will it impact market near term?

Equity benchmarks have recovered from the day's low and investors seem to be veering to the view that Trinamool Congress's decision to withdraw support to the ruling United Progressive Alliance will not have have much of an impact. More importantly, the market is betting that the government will stick to the reforms course with the help of support from other parties like the Mulayam Singh-led Samajwadi Party or Mayawati-led Bahujan Samaj Party. Last Thursday, the government had hiked diesel prices by Rs 5 a litre and the following day, approved Foreign Direct Investment in sectors like retail, aviation and broadcast carriage, and part divestment in state-owned companies.

Don't miss: TMC exit may empower UPA to move ahead with reforms

With India teetering on the brink of a sovereign rating downgrade, economic reforms are crucial for the government to repair its battered balance sheet and avert the downgrade. In the event of a downgrade, foreign borrowing will become expensive for both the government and corporates. In addition, portfolio investments too could be hurt as many foreign institutions are prohibited from investing in countries below a certain rating threshold.

Here are some brokerages' views on the how the latest political development will affect the course of the market:

Citi view

• Low probability of govt falling
• India has had a precedent of 'minority' govts
• Given outside support, govt could continue
• Other pending reforms may not create as much resistance
• Threats of slow growth & ratings action on cards

• Protestations may merely be political theatre
• Parliamentary math also provides buffers.
• We remain structurally cautious

• Political developments 'not much of great import'
• Implications for markets unlikely to be significant
• Reiterate our target of 19,000 on Sensex
• Expect Parliament to be dysfunctional in coming year
• "More to the point, all of this is largely going to be a sideshow for the stockmarket which will rightly focus on what the Govt. is doing on issues of substance (eg. fiscal consolidation, tax exemption for FIIs, the coal-power-SEB mess, etc) rather than the tactics of opportunistic regional parties," says the Ambit strategy note.