Maharashtra Election win to boost market sentiment in the near-term, govt spending will be key to growth, state fiscal concerns persist

After a 2000-point rebound on the Sensex, markets are set to extend gains, buoyed by Maharashtra's election win and hopes of a capex revival.

India’s equity markets are likely to react positively to the BJP-led Mahayuti alliance’s landslide victory in Maharashtra, which exceeded exit poll predictions and ended years of political instability in one of the country’s most industrialized states. The decisive mandate, which aligns the state with the central government, is expected to expedite infrastructure development and tackle long-pending governance issues. However, fiscal pressures stemming from pre-election populist measures could weigh on long-term economic prospects of the states, warn analysts.

After a strong 2000-point rebound on the Sensex on Friday, the markets are expected to continue the rally with a feel-good around the Maharashtra election win, and hopes of a revival in capex in the second half. The GIFT Nifty, which indicates how the Indian equity market opens in trade also signals a robust start for November 25 with a premium of over 400 points, suggesting a significant gap-up opening for the Sensex and Nifty 50 indices.

A strong push in government spending will be critical for growth in the second half especially as economic growth has slowed unexpectedly in the second quarter of FY25, analysts said. In H1FY25, overall government spending has been flat on a year-on-year basis and capex is down 17%. Private capex has not been able to pick up pace to make up for the slowdown in government spending. This combined with a slowdown in urban consumption has weighed on corporate earnings setting the stage for a price correction amid elevated valuations.

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Motilal Oswal highlighted that the political clarity following the elections could provide a much-needed boost to investor sentiment. The brokerage noted that recent market corrections—around 9% across the Nifty50, Nifty Midcap 100, and Nifty Smallcap 100—were driven by subdued corporate earnings, persistent foreign outflows of nearly $14 billion since October, and geopolitical uncertainties. With the BJP’s strong showing in Maharashtra and Haryana, the central government may prioritize fiscal spending to revive growth. “This poll result, coupled with improving rural demand post a good monsoon and expected strong Kharif output, could set the stage for a mini risk-on rally,” Motilal Oswal said.

However, fiscal challenges loom large. Madhavi Arora of Emkay cautioned that populist welfare schemes, particularly financial assistance programmes for women, will strain state budgets. Maharashtra’s fiscal deficit is expected to widen by an additional 0.1% of GSDP in FY25, while aggregate state deficits could slip to 3.15% of GSDP, up from the 3.0% budgeted. “To manage the additional burden, sharp cuts in capital expenditure are inevitable, with FY25E capex now estimated at 2.0% of GSDP versus the 2.5% budgeted,” she wrote.

Despite the push and pull factors, the markets could continue to gain ground in the very near-term. But the sustainability of the rally will be determined by one key factor – how foreign investors behave in the coming days. This will be determined in turn by two important factors – any news on the geo-political situation which continues to be precariously poised, and the trajectory of the dollar index and US treasury yields. While the US benchmark yield fell last week, the bond markets continue to be nervous about potential impact of possible Trump policies and the ability of Fed to effect further cut in rates in the year ahead.

In the medium-term, all eyes will be on earnings of companies in Q3.

On a relative basis, valuations for large-cap stocks appear attractive, with the Nifty trading at 19.3x FY26E earnings, but midcaps and smallcaps remain expensive at ~30x and ~23x P/E, respectively, according to Motilal Oswal.

While Maharashtra’s decisive mandate offers the prospect of political stability and economic momentum, it also underscores the growing influence of populist measures in shaping electoral outcomes. Analysts agree that the market’s next moves will depend heavily on the government’s ability to balance fiscal prudence with growth-oriented spending.

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