Slender win for NDA queers pitch for Street, investors lose ₹31 trillion

The Nifty and Sensex plunged the most in four years as it became clear that the Narendra Modi-led Bharatiya Janata Party (BJP) will fall short of the 272 seats required to form a government on its own. While the BJP-led NDA secured a comfortable majority, the numbers were far below Modi's call for 400 seats, and exit poll predictions of above 350. The BJP is set to wint 240 seats and the NDA in 293 seats.

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The Nifty plunged 5.93% to 21884.5, its worst fall since its 12.98% crash on 23 March, 2020, a day before the nation entered the first pandemic lockdown. The Sensex tanked 5.74% to 72079.05, the most since 4 May, 2020. The selling was led by foreigners who sold a whopping ₹12,436 crore worth of shares and mounted bearish futures positions, provisional BSE data showed. Local institutions sold ₹3318.98 crore of shares.

While market experts do not expect any drastic change in economic trajectory, they believe stocks will remain turbulent until clarity emerges on government formation, and investors digest Tuesday's rude surprise.

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Bluechips like Reliance Industries, HDFC Bank, ICICI Bank, L&T and SBI, which fell 5-15%, contributed over half of Nifty’s 1379-point correction. Nifty Midcap 150 and the Nifty Smallcap 250 fell by the most in four years to 18476.25 and 14761.1, deepening investor wealth erosion.

 

“Most of the poison is out, after Tuesday’s correction," said Raamdeo Agrawal, co-founder and chairman of Motilal Oswal Group, when asked about the market direction. “We could correct a bit more technically, say, 2-3%, but not the same way we fell today (Tuesday), with NDA set to return to the Centre led by Narendra Modi."

Fear guage surges

The nervousness was underscored by fear gauge India Vix rising 27.7%, the most in 27 months, to 26.75. Vix and markets move in opposite directions, with a steep rise in the volatility index seen as a sign of nervousness and a fall seen as an increase in confidence.

"The broad direction of the economy is unlikely to change, though factor market reform and privatization are off the table. India is likely to now derate due to higher risk perception. Switch from PSUs and capital goods to FMCG and buy Indian equities if the Nifty falls below 20,000," analysts at Emkay Global said in a 4 June note.

On Tuesday, bond yields jumped and the rupee logged its biggest drop in a year. The benchmark 10-year government bond yield rose nine basis points to 7.04%, the most since October 2023. The rupee fell 0.45% to 83.52 a dollar, its steepest fall since June 2023.

Agrawal of Motilal Oswal said investors could consider buying quality stocks once a new government is in place, with many constituents underperforming indices they were part of. However, he cautioned that markets would go into “free fall" in the unlikely event of the INDIA bloc forming a new government.

Aside from cash market sales, FPIs also raised their short index futures positions to 355,379 contracts from 196,944 contracts on 3 June. Retail and high networth investors, on the other hand, increased their bullish index futures bets to 333,364 contracts from 188,947 contracts.

Also read: FPI net sellers worth ₹12,436.22 crore in the markets: Experts expect near-term volatility

Foreign investors hedge their bets

As of Tuesday, FIIs have hedged part of their $800 billion Indian equity assets by shorting index futures. They hedged these index futures (Nifty and Bank Nifty) bearish bets, in turn, by shorting index call andputoptions.

"It is possible that Modi 3.0 may not be as reform-oriented as the market expected, and may turn more welfare-oriented. This is getting reflected in the strength of FMCG stocks," said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.

“The markets would now weigh the pace of reforms; whether there would be any tweaks or continuation of policy," said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies. “There is that uncertainty right now and we’d have to wait for commentary overnight from the winning coalition. It seems that the valuation premium that India commanded to its Asian peers would be under a cloud."

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The Nifty's one-year forward price-earnings multiple now stands at 17.7 times, against MSCI Asia’s (ex-Japan) one-year forward PE of 12.02.

"The stress in mass market consumption (as seen through company earnings data) may come into focus for the government," analysts at UBS said in a note. "While the overall focus on infrastructure and capex could continue, some fiscal room may need to be made for populist measures. As our India economics team writes, that could mean some delays in fiscal consolidation path. Some of the key flagship schemes of the govt from the market perspective - like PLI (manufacturing incentives) could continue - although upsizing of incentive dollars could be tough. Reforms that could be placed on cold storage include - Agri/food subsidy reforms, land reforms, direct tax reforms," the analysts wrote.

Veteran investor Vijay Kedia said newbie investors should “wait on the sidelines", until more clarity emerges after a new government is formed.

“If you’re a long-term investor, waiting won’t kill you. Better to enter after the event settles and clarity emerges on the economic footprint, even if you have to buy a stock at a 10% higher level," Kedia explained.

Ahead of the exit polls, which had predicted the BJP-led alliance would win over 350 of the 543 seats in the lower house of parliament, a Bloomberg survey had shown that stocks may tumble by as much as 10% if the BJP fails to cross the halfway mark of 272 seats. Opposition leaders had dismissed the exit polls when they were released over the weekend, and a senior Congress party leader described the early results on Tuesday as a “pleasant surprise."

“We were against a lot of cynicism," said Salman Khurshid, speaking to deKoder, an online news channel. “Our own reading on the ground was that something like this will happen or something better than this will happen."

Market capitalization of companies listed on the BSE plunged to nearly ₹395 trillion during the day, from nearly ₹426 trillion at the previous session's close.

 

Gopika Gopakumar and Nishant Kumar contributed to this story.