Markets set for a boost as exit polls predict landslide win for NDA

Sensex, Nifty seen gaining up to 2%; Bearish FPI positioning could lead to short covering

Domestic equity markets are set to gain as much as 2 per cent on Monday after the exit polls released on Sunday projected the ruling National Democratic Alliance (NDA) to win two-thirds majority in the Lok Sabha elections.

The prospects of political continuity and hopes of economic reforms are likely to prompt investors to increase their wagers on domestic stocks ahead of the actual outcome on June 4.

Moreover, higher-than-expected gross domestic product (GDP) numbers for the financial year FY24 and encouraging US economic data are also expected to keep sentiment buoyant.

The Sensex and Nifty last closed at 73,961 and 22,531, about 2.5 per cent below their lifetime highs seen on May 27.

“The exit poll results have come to the market's liking and will stoke bullish sentiment. Despite the global slowdown, the Indian economy has grown by more than 8 per cent, the credit for which has to be given to the current dispensation. Investors want the current momentum in economic growth to be sustained. You need policy continuity and no disruptions,” said Raamdeo Agrawal, chairman of Motilal Oswal Financial Services.

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A dozen exit polls conducted by various agencies and media organisations gave the NDA anywhere between 316 and 400 seats. The exit poll results were published on Saturday after the final phase of the seven-phase elections, which had begun on April 19, concluded.

Some say traders may refrain from going all out with the bullish bets. They may wait for the actual results on Tuesday, given the patchy record of the exit polls.

If the exit polls are indeed accurate, the upside could still be limited as the markets have largely priced in NDA’s victory. However, a surprise defeat for the Bharatiya Janata Party (BJP) would send shockwaves across the market.

“The base case was always that the BJP will come back. The doubt was whether they would be a dominant party or overly reliant on allies to push through their agenda. The discourse during the elections in a section of the media was that the ruling party is on the back foot and the opposition may cobble up a slender majority. This worries markets about the prospect of overtly populist policies post-elections,” said UR Bhat, co-founder of Alphaniti Fintech.

While the equity markets didn’t fall much, they saw heightened volatility in the last two months. This came as concerns of lower turnout and voter fatigue cast doubts over BJP’s victory margin.

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The Sensex and Nifty are up 1.2 and 1.7 per cent, respectively, since the elections began on April 19.

However, the India Vix, a gauge of market volatility, has jumped over 82 per cent to a two-year high of 24.6 during this period.

Selling by foreign portfolio investors (FPI) added to investor woes. In May, they sold shares worth nearly ~26,000 crore, most since January 2023.

Some believe FPI positioning at present is bearish and a positive poll outcome may lead to short-covering. This will send the stock market soaring.

However, beyond the near-term moves, investor focus is likely to shift to the policy reforms and the Union Budget.

“In any case, the disappointment or the euphoria may settle down in a couple of days. Focus may shift to the policy announcements in the first 100 days of the new government. The fact that the BJP could return to power is good for continuing and accelerating the reforms process,” said Dhiraj Relli, MD & CEO, HDFC Securities.

“At best, the euphoria will persist for another few days. The big question is whether all the shorts will be covered tomorrow or whether they will keep some of those positions until the results are declared. If the shorts get covered, markets could see a 1-2 per cent gap up opening on Monday,” added Bhat.