Lok Sabha by-poll results put BJP on back foot, will this impact markets?

Date: September 25 | Extent of loss: 504 points (1.29 percent)| Reason: Concerns over the health of the economy, news of impeachment inquiry against US President Donald Trump, tension in the Middle East and uncertainty over the US-China trade deal kept the market under pressure. (Image: Reuters)

The Bharatiya Janata Party suffered a setback on Thursday after it failed to retain the Kairana (Uttar Pradesh) and Bhandara-Gondiya (Maharashtra) Lok Sabha seats. This suggests build up in anti-incumbency, which may keep D-Street on shaky ground till the 2019 general elections, experts said.

The electoral defeat brings down the ruling party's tally in the lower house of Parliament to 274 seats. If one does not account for party rebels Shatrughan Sinha and Kirti Azad, the BJP's strength is effectively 272.

A series of defeats in by-elections, coupled with a few resignations, have led to the saffron party’s numbers declining in the Lok Sabha.

In the 2014 general elections, the BJP had bagged 282 seats. Including support from its allies, the Narendra Modi-led National Democratic Alliance (NDA) had 336 seats.

The recent dip in BJP's tally were triggered by the resignation of BS Yeddyurappa and B Sreeramulu when both turned Members in the Karnataka Legislative Assembly.

“The opposition tactic of consolidating into a successful non-BJP front appears to be succeeding. We expect a similar result in the 2019 general election, led by the Congress,” Nomura said in a recent report.

The global brokerage firm added that the results do suggest a build-up in anti-incumbency.

However, Ajay Bodke, CEO and Chief Portfolio Manager PMS at Prabhudas Lilladher, feels the market has discounted fallout of the by-election result. “The BJP needs to rework its strategy, factoring in opposition unity, in the forthcoming state as well as national elections and frame its narrative accordingly."

The Nifty has rallied nearly 300 points from its intraday low of 10,417 recorded on May 23 and is just 433 points shy of its all-time high of 11,171. But there are plenty of headwinds that could cap the upside: rising crude oil, currency woes, as well as trade war concerns.

Market experts see political uncertainty remaining till the 2019 general elections as the government might rollout populist measures, which could strain India's macros further. The latter has been deteriorating due to rise in crude oil prices, but strong 7.7 percent year-on-year growth in Q4 GDP helped investor sentiment.

“Going forward, political uncertainty will remain elevated in the run-up to the election. We expect the government to focus on farmers and the common man via higher minimum support prices and farm loan waivers,” Nomura said.

The overhang of rising crude prices may also remain on the markets. Bodke explained the market is focused on the outcome of the crucial meeting between the Organisation of the Petroleum Exporting Countries and Russia on June 22.

"If both parties agree to a large increase in global production, the likelihood of a further slide in crude prices can't be ruled out. This would reduce risk aversion and spur a strong rally in equities of those economies that are heavily dependent on crude imports like India.”