Indian stock market & election results
The relationship between the Indian elections and the stock market is a crucial aspect that reflects the intricate interplay between politics and economics in one of the world’s largest democracies. Elections, particularly the general elections held every five years, hold the power to significantly impact investor sentiment and market performance.
Understanding the Indian stock market’s sensitivity to general elections is crucial. It underscores the significance of political stability for investors. Notably, the 2014 and 2019 general elections, which saw a decisive victory for the Bharatiya Janata Party (BJP) led by Narendra Modi, triggered substantial market rallies. The Sensex and Nifty indices surged as investors anticipated reforms, economic growth, and a stable political environment conducive to business and investment.
Conversely, election results that yield coalition governments or political uncertainty can lead to market volatility. Investors typically view fragmented mandates as obstacles to policy implementation and economic reforms. The 2004 general election, where the incumbent BJP lost to a Congress-led coalition, saw an immediate market downturn due to unexpected political change and uncertainty about economic policies.
Political stability and economic policies
Political stability is a critical factor influencing market sentiment. Stable governments with clear mandates are perceived as capable of enacting and sustaining economic policies that promote growth, liberalization, and foreign investment. For example, the BJP’s victory in 2014 and 2019 was accompanied by expectations of significant economic reforms, including implementing the Goods and Services Tax (GST) and measures to improve the ease of doing business. These reforms were seen as steps toward enhancing economic efficiency and attracting investment, thus boosting market confidence.
Political instability or frequent government changes can have a detrimental effect on the stock market. This underscores the need for stable governments. The stock market tends to react negatively to political uncertainty, which can delay investment decisions and impact overall market performance.
Policy expectations and investor behavior
Investor behaviour is not just influenced, but closely tied to expectations regarding economic policies that are likely to be implemented by the incoming government. The market generally welcomes pro-business policies, such as deregulation, tax incentives, and infrastructure development. These policies are not just expected to stimulate economic activity, improve corporate earnings, and enhance market returns, but also to shape the decisions and actions of individual investors.
For instance, the BJP’s 2014 election manifesto, which promised economic revival through infrastructure development, tax reforms, and foreign investment promotion, positively influenced market sentiment. The anticipation of these policies contributed to a market rally even before the election results were announced, reflecting investor confidence in the potential for economic transformation.
Impact of populist measures
However, not all policies perceived positively by the electorate are favoured by the market. Populist measures, such as increased subsidies, loan waivers, and expansive welfare programs, can strain public finances and lead to fiscal deficits. Such policies may raise concerns among investors about the sustainability of economic growth and fiscal discipline. The 2009 general election, which saw the Congress-led United Progressive Alliance (UPA) return to power, led to initial market gains. However, subsequent announcements of populist measures and concerns over fiscal prudence tempered investor enthusiasm.
Role of speculation
The period leading up to elections is not just a time of anticipation but is often characterized by heightened speculation and volatility in the stock market. Investors and traders find themselves in a state of flux, attempting to predict election outcomes and position their portfolios accordingly. Opinion polls, political campaigns, and economic indicators contribute to this market speculation, which can lead to short-term volatility and the need for careful, strategic planning.
Market corrections post-elections
The market often undergoes corrections post-election as actual policy directions become clearer and speculative positions are unwound. The initial euphoria or pessimism tends to stabilize as investors reassess the economic landscape based on concrete policy announcements and government actions. For example, after the 2014 general elections, the initial market rally was followed by consolidation as the new government’s policy measures were scrutinized and their impact assessed.
The relationship between Indian elections and the stock market is multifaceted, encompassing immediate market reactions to election results, the influence of political stability, and investor expectations of economic policies. While pro-business governments and clear policy directions boost market confidence, political uncertainty, and populist measures can lead to market volatility and cautious investor behaviour. Understanding this dynamic interplay is crucial for investors and policymakers alike, as it highlights the significant role of political developments in shaping economic and market outcomes in India.
How did BSE Sensex perform under the leadership of Narendra Modi?
Fig: 1
Over the past decade, the Indian stock market has experienced rapid growth, with the BSE SENSEX increasing by over 200%, demonstrating remarkable resilience despite facing two significant dips. The first instance was the 2016 demonetization, which initially caused a negative market reaction, but the Sensex quickly rebounded as the economy adapted to the new monetary policy. The second instance was the COVID-19 pandemic in 2020, which led to a sharp decline in the market early in the year. However, the strong recovery that followed highlighted the underlying robustness of the Indian economy and the effectiveness of government measures in supporting businesses and restoring investor confidence (fig: 1).
Impact of last three Loksabha elections on the Indian stock market
Fig: 2
The impact of the Lok Sabha elections on the Indian stock market reveals significant variations in market sentiment and volatility over the past three election cycles. During the 16th Lok Sabha, the market showed robust resilience, with a 6.7% increase from the starting point to the exit poll and a notable 9.2% rise by the final result. This period marked a strong positive response, further underscored by a 2.4% gain from the exit poll to the result. However, the 17th Lok Sabha saw more tempered reactions, with only a 1.1% increase leading up to the exit poll and a modest 1.8% rise by the results, alongside a slight 0.7% increase from the exit poll to the result, indicating a cautious yet positive market outlook. The trend of moderated optimism continued into the 18th Lok Sabha, with a 5.3% rise from the starting point to the exit poll, but only a 1.3% increase by the final results and a notable -3.8% shift from the exit poll to the result, reflecting growing market volatility and reduced investor confidence as election results deviated from initial expectations (fig: 2).
The analysis of the BSE SENSEX performance during the Lok Sabha elections over the past three cycles highlights the dynamic nature of investor sentiment and market volatility in response to political events. The 16th Lok Sabha election period exhibited strong investor confidence and positive market reactions, driven by a significant rise from both the starting point to the exit poll and the final results. In contrast, the 17th Lok Sabha saw a more cautious but still positive market response, with smaller percentage increases suggesting a more measured optimism among investors. The 18th Lok Sabha elections marked a shift towards increased volatility and reduced confidence, evidenced by the substantial drop from the exit poll to the final result. These trends indicate that while elections can initially boost market sentiment, the final outcomes and their alignment with investor expectations play a crucial role in shaping the overall market response, with growing volatility in more recent election cycles reflecting heightened uncertainty and fluctuating investor confidence.
Impact of exit poll on Indian stock market under Modi era
Fig: 3
In the 16th Lok Sabha (2014) elections, there was a positive market reaction, with the market opening at 2.28% and peaking at 5.43%, before closing at 1.05%, indicating an overall optimistic sentiment. Conversely, the 17th Lok Sabha (2019) elections experienced a mixed response; despite opening at 2.30%, the market closed at -1.38%, reflecting a decline as results deviated from exit poll expectations. The 18th Lok Sabha (2024) elections showed a stark negative shift, with all indicators in the red: the market opened at -0.39% and dropped significantly, closing at -5.74%, highlighting a substantial negative market reaction. This trend suggests increasing market volatility and negative sentiment surrounding election outcomes over the three cycles (fig: 3).
When we compare the stock market performance between exit polls and actual results over the three election cycles, a stark contrast emerges. In 2014, the market’s overall positive sentiment was clear, despite fluctuations. The 2019 elections, however, showed a mixed response, opening positively but closing in the red as results deviated from expectations. By the 2024 elections, the market reaction was decidedly adverse, with significant drops from opening to closing. This contrast underscores the unpredictability of election outcomes and its direct impact on the market. This trend of increasing market volatility and negative sentiment highlights a growing uncertainty and lack of confidence among investors regarding election outcomes. It suggests that political unpredictability and its perceived impact on economic policies and market stability have become significant concerns for investors over recent election cycles.
About Author: Pankaj Chowdhury is a former Research Assistant at the International Economic Association. He holds a Master’s degree in Demography & Biostatistics from the International Institute for Population Sciences and a Bachelor’s degree in Statistics from Visva-Bharati University. His primary research interests focus on exploring new dimensions of in computational social science and digital demography.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of 360 Analytika.
Acknowledgement: The author extends his gratitude to the BSE (formerly Bombay Stock Exchange) for providing data support.
This article is posted by Sahil Shekh, Editor at 360 Analytika.
