Polls, policy and policing: How elections, budget, SEBI, RBI all influenced the Indian stock market in 2024

The year gone by saw a flurry of triggers coming from the government.

The year gone by was especially active for the markets, with a flurry of triggers coming from the government, regulators and the political front as well in the form of elections. Let's take a look at the key government-related activities and how they moved the markets in 2024.

SEBI cracks the whip

Markets regulator Securities and Exchange Board of India (SEBI) cracked the whip quite hard in 2024, taking decisive action against not only individuals and organisations, but also came out with decisions that impacted the entire securities ecosystem in India.

Of the two big moves SEBI undertook in 2024, the first was the stress test requirement. Mutual funds were asked to close the liquidity of a fund, so investors could assess how liquid their capital parked in these funds is. The sharp run-up in small-cap stocks caused huge mark-to-market gains, but due to the lower trading volumes, the markets regulator expressed concerns about the liquidity, in case a slew of investors decided to redeem their portfolios.

The second, and arguably more impactful, move was the overhaul of the futures and options (F&O) sector. Retail investors that turned towards derivatives to make a quick buck were mostly making losses – a SEBI study pegged this share at over 90 percent - causing the regulator to revamp the regulations in the F&O space.

A portion of rules came into effect on November 20, 2024, which included increased lot sizes, the reduction in the number of weekly expiries, and a bump up in contract sizes. The attempt was to rein in volatility, especially on expiry days, and also cut down retail losses.

Also Read | Throwback 2024: How FPI flows and ownership changed in the year gone by

Elections: NDA shocks, Trump returns

Over 64 countries across the globe went to polls in 2024, marking it as the largest election year in recorded history. However, the domestic markets looked towards three key elections for cues: the Lok Sabha election in June, the US Presidential election in November, and the Maharashtra state elections held following Diwali.

The Lok Sabha election results came as a shock to the markets, which had largely priced in a complete majority for the BJP-led National Democratic Alliance, with expectations of the coalition cinching over 400 seats in the party. The picture on the cards was more somber, with the BJP failing to secure a majority in the parliament.

As a result, the benchmark indices took a tumble – post a huge single-day gain basis the exit polls -- crashing over six percent each, while the small- and mid-cap indices crashed over eight percent.

Thereafter, the focus in the domestic landscape shifted towards the Maharashtra Assembly elections to see if the BJP-led Maha Yuti alliance could retain its stronghold. The state was especially important, since Maharashtra is the largest state in terms of GDP contribution as well as FDI inflows.

With BJP’s roaring comeback in the elections, bagging 132 seats in the 288-member Assembly, investors across the world were assuaged by the results that showed that the incumbent could hold onto power.

The elections in the US also played a key role in moving the Indian markets. The frontline indices Nifty 50 and Sensex closed over a percent higher each following ex-President Donald Trump’s win, with the information technology and pharma sectors seeing the most gains. The export-oriented sectoral indices have gone on to rally further, as the local currency weakens against a strengthening US Dollar.

Budget: Playing fast and loose with taxes

The election results took the nation by surprise. Some might go even so far as to say, the election results took the incumbent party by surprise. Many experts suggested that a series of measures announced in the Union Budget 2024-2025 were completely populist in nature – focusing on rural empowerment, employment, and skilling – just to assuage future voters.

Further, the Budget made large allocations towards Andhra Pradesh and Bihar, two states that were critical in ensuring that the BJP-led NDA clinched a majority in the Lok Sabha polls.

These were also largely priced in though. What the markets did not expect was the tax curveball the Ministry of Finance threw. From the Union Budget presented in the year ago on February 1, 2023, to the Budget presented on July 23, 2024, the benchmark indices saw a whopping 40 percent rally. As a result, FinMin decided to take a larger piece of the pie, hiking the STT rate on derivatives and increasing the LTCG to 12.5 percent and STCG to 20 percent.

RBI aggression

The Reserve Bank of India also hogged the limelight in 2024, with serious crackdowns seen on microfinance institutions, Kotak Mahindra Bank, gold financiers, IIFL Securities, and Paytm Payments Bank.

MFIs: The RBI came down on four microfinance institutions, asking the lenders to cease and desist sanction and disbursal of loans. The four firms flagged were Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance, and Navi Finserv. The central bank raised issues with the pricing policy of the firms, which were found to be excessive and not in adherence with the regulations.

Gold Financiers: RBI sent Manappuram Finance and Muthoot Finance, an advisory letter limiting cash disbursal of loans. The central bank has reportedly asked both NBFCs to strictly adhere to the Income Tax Act (IT) provision on cash disbursement, and said that no NBFC should disburse loan amount in excess of Rs 20,000 in cash.

Paytm Payments Bank: On January 31, RBI directed the digital lender to stop accepting deposits or credit transactions or top-ups in any customer accounts, prepaid instruments, wallets, FASTags, and NCMC cards after February 29. This is excluding cashbacks, or refunds.

IIFL Finance: On March 4, the central bank imposed curbs on IIFL Finance, asking it to stop disbursing new gold-backed lending following “material supervisory concerns”. However, the bank lifted its restrictions on September 19, allowing the gold loan arm to resume business.

Kotak Mahindra Bank: The private sector lender was barred from onboarding new customers through its online and mobile banking channels and issuing fresh credit cards as the RBI found deficiencies in the areas of IT inventory management.