Markets shed early gains after dramatic swings in Karnataka

As the months roll by, each passing state election gains increasing significance in India, as they are all leading up to the mega general elections in 2019, or perhaps even as early as end of this year, given the emerging verdict of the Karnataka state elections on Tuesday.

Amid intense drama and see-sawing, the Bharatiya Janata Party (BJP) emerged as the single largest party (in terms of wins and leads) with 104 seats as at 6:42 pm. But the BJP may yet not be able to form the government in the state as its tally fell below the halfway mark of 112 seats. On the other hand, with its 78 seats, the Indian National Congress, which rules the incumbent government in the southern state has decided to extend its support to the Janata Dal (Secular) [JD(S)], which won 37 seats. The Congress hopes to form a coalition government led by the JD(S), which has staked its claim to power with Karnataka’s governor Vajubhai Rudabhai Vala.

But who will rule Karnataka for the next five years is far from clear as BJP leader and chief ministerial candidate BS Yedyurappa has claimed that his party can prove its majority on the floor of the Karnataka Assembly if called upon to form the government.

The halfway mark in the Karnataka legislative assembly (which has 222 seats) is 112 seats and the party/parties that reach this figure will form the next government in the state. The Congress-JD(S) combine’s tally will take it past this figure with 115 seats, whereas BJP will have to cobble together at least eight more seats to be in contention.

While it is still not sure if the BJP will form the government, the party that also helms the central government under the leadership of Narendra Modi has clearly made deep inroads into Karnataka.

On Tuesday morning, when it appeared that the BJP was racing ahead of the Congress and other opposition parties, the market (S&P BSE Sensex) soared around 400 points. But with the news of a potential Congress-JD(S) combine trickling in, it shed all its early gains on Tuesday and marginally declined at 2:40 pm. The S&P BSE Sensex eventually ended Tuesday’s trade at 35,543.94 points, down 0.04%.

Adi Godrej, chairman of the Godrej Group pointed out that it was too early to say what could likely happen in Karnataka and said that which party forms the next government will only become clear over the next three-four days.

VK Sharma, head of the private client group and capital markets strategy at HDFC Securities said that the markets wouldn’t be too perturbed even if Congress-JD(S) was to form the government as the BJP had emerged as the single largest party in the state.

Vaibhav Sanghavi, co-chief executive officer of Avendus Capital Public Markets Alternate Strategies, says that post the initial reactions to the Karnataka poll verdict, the market will go back to focusing on macro data such as inflation, bond yields, oil prices and currency movements.

BJP’s performance in Karnataka will further bolster the party’s chances in the upcoming general elections as the report card will be used as an endorsement of Modi’s policies and corruption-free image. On the other hand, the BJP’s opposition points out that the verdict in Karnataka was more a referendum on the shortcomings of the current Congress-led government in the state under the leadership of chief minister Siddaramaiah.

“The verdict in Karnataka will further consolidate the position of the BJP,” says Harsh Goenka, chairman of RPG Enterprises. “Industry always wants a government with a strong majority so that it can take strong steps towards globalization. And the Karnataka results should help the BJP in the next general elections.”

Siddharth Khemka, head of retail research at Motilal Oswal Securities said the trends in the markets over the last few weeks indicate that Dalal Street had factored in a decisive win for the BJP. However, he went on to say the BJP’s strong performance in Karnataka bodes well for the upcoming general election. “While they may be short of the majority, BJP has emerged as the single largest party and that trend is something that could help them in the upcoming General Elections,” Khemka said.

Jagannadham Thunuguntla, senior vice president and head of research at Centrum Broking calls the Karnataka poll results as ‘market positive’. “One near term overhang is cleared, that too in the way market was looking forward to,” says Thunuguntla. “Next domestic political cue markets look forward to is there possibility and probability of early Lok Sabha elections announcement,” Thunuguntla adds.

Sunil Kanoria, vice chairman of Srei, says that the BJP’s performance in Karnataka is a vote of confidence in Prime Minister Narendra Modi and reaffirms the country’s faith in his abilities. “I hope the PM will roll out the pending reforms with renewed vigour, which will result in a definitive recovery in the business climate, especially in private sector investments.”

“General elections are going to be very important and are a big binary event, as we have seen in previous elections. However, before general elections, there are other three important states going into elections which will be watched closely by the markets, before forming any expectations,” says Sanghavi. “But as things stand, we think that rural economy and infra spend will continue to be in focus leading to robust economic activity”