Speaking on why elections affect markets, KN Vaidyanathan, CEO, Alchemy Capital Management, said the government is the biggest stakeholder in the economy from a revenue, spending, and investment standpoint. "So, who runs the government is an important directional thing." He feels the party that comes to power is particularly important in the current global meltdown. "It is important for the government to determine what policy initiatives you set in place to extricate the economy out of a potential slowdown."

AK Bhattacharya, Managing Editor, Business Standard, said, the markets always kept guessing whether or not the new government will be stable and what kind of policies will come out of that. "Market participants take clues from the way the economy grows or doesn’t grow. Market participants are always concerned about what kind of government is in place, and hence, elections are very critical."

Vaidyanathan does not think this rally in Indian equities today can be attributed to a pre-election rally. "In India, elections consist of two parts. The actual election is the minor event. The government formation post election is the major event."

He believes most people have not discounted the fact that it is going to be a fairly fractured mandate like we have seen in the past. "That is why you are possibly going to see some recommendations to safety or safe haven measures around pre-elections or elections. Then you could have a little definitive move immediately thereafter depending on what formation comes out finally."

Bhattacharya feels there will be an increase in investment in infrastructure when the new government comes to power. "Whichever government or whichever party comes to power at the Centre, we are bound to see a sharp increase in spend on infrastructure which is prime need of the hour. So, wide infrastructure spend yes; more tax cuts yes; but I have my own doubts whether the new government to be formed after the elections will go in for more divestment of stakes in PSUs."

Also see: Looming elections boosts aviation, media sector