Bihar CM back into NDA fold: Markets cheer break in mahagathbandhan

Nitish Kumar's decision to snap ties has come as a jolt to the Grand Alliance, or the 'Mahagathbandhan' as it was popularly known, but the markets will take this development as a long-term positive for the Narendra Modi - led National Democratic Alliance (NDA) government, feel analysts.

Reacting to key domestic and global developments, the markets gained ground on Thursday, with the S&P BSE Sensex rallying nearly 220 points to 32,602 levels and the Nifty50 index gaining 66 points to 10,087 levels.

In post market hours on Wednesday, Nitish Kumar quit as the Chief Minister of Bihar, ending the two-year old 'Mahagathbandhan' that included his party - the Janata Dal (United), or the JDU, Rashtriya Janata Dal's (RJD's) Lalu Yadav and the Congress.

The move, analysts say, will be seen as a long-term positive by the markets and will strengthen the government's bargaining power in the Rajya Sabha, the Upper House of Parliament.

"The development will be a positive for the markets. A loss in Bihar was the biggest setback for Narendra Modi after his party formed the government in 2014. Nitish forming a government again and forming an alliance with the BJP will give more fire power to the latter in the Rajya Sabha. This augurs well for the overall policy reform agenda of the government. It is a blessing in disguise for the markets," says A K Prabhakar, head of research at IDBI Capital.

Bihar election result in November 2015 was then being seen as an indicator of the BJP's / NDA's policies since it assumed power in May 2014. Putting up a stunning show, the JD (U)-led 'Mahagathbandhan' won a thumping majority in the Bihar assembly after inflicting a crushing defeat on the BJP-led NDA.

"Nitish joining hands with the BJP has strengthened Modi-led NDA in the run up to the general elections in 2019, especially in Bihar and eastern Uttar Pradesh. Two themes that will resonate well with the markets will be probity in public life and clean, effective administration and governance. Even if there are ideological differences, it will be a big positive if the alliance is able to deliver on reforms. All this will augur well for the markets," says Ajay Bodke, CEO and chief portfolio manager (PMS) at Prabhudas Lilladher.

Another key development markets were eyeing was the outcome of the US Federal Reserve (US Fed) meeting on interest rates. After a two-day meet, the US Federal Reserve kept key rates steady, which was in line with most analysts had predicted.

Going ahead, all eyes are now on the Reserve Bank of India's (RBI's) two-day meet on August 2, where most expect the central bank to cut rates given the recent consumer price inflation (CPI) data. That apart, corporate results, F&O rollover for the July series and the progress of monsoon will dictate market trend, analysts say.

"We expect the RBI to cut repo rate by 25 basis points (bps) in its policy review on August 2, 2017. Incoming inflation readings have been softer than expected led by sharp dip in food inflation. What's particularly comforting is the continuous broad-based fall in core inflation over the past one year. While we do anticipate the spike in vegetable prices to lift inflation from the current level, overall CPI is still likely to remain at a comfortable level," write Kapil Gupta and Prateek Parekh of Edelweiss Research in a note.