India’s currency and stock markets are in for a rocky week as an upset for the country’s ruling party looms in some state elections

^{(Image source- Reuters)}

• The BSE Sensex and the rupee slumped on Monday morning as data from exit polls indicated a possible upset for the Bharatiya Janata Party (BJP), in the state elections in Rajasthan, Chhattisgarh and Madhya Pradesh.
  
• While it looks like the Congress will gain the upper hand in Rajasthan, polling data points to an extremely close finish in the other two states.
  
• The results don’t necessarily portend any change in the long-term trajectory of India’s currency and stock markets, but they will likely cause some short-term panic amongst investors and an outflow of foreign funds.
  
  

It looks like the rupee and Indian equities are in for a volatile period in the immediate term.

The Sensex, a benchmark index of 30 stocks on the Bombay Stock Exchange, slumped by over 650 points on Monday morning as data from exit polls indicated a possible upset for India’s ruling party, the BJP, in the state elections in Rajasthan, Chhattisgarh and Madhya Pradesh. The rupee had also fallen by around 50 paise to 71.3 against the US dollar as of Monday morning.

While it looks like the Congress will gain the upper hand in Rajasthan, polling data points to an extremely close finish in the other two states. An electoral loss by the BJP, be it one state or more, or a hung result is bound to roil stock markets even further as it will indicate a period of adjustment in the short-term as governments change hands.

It will also expose a loss of public faith in the ruling party as it prepares for national elections in May next year. The three states, all of which are currently ruled by BJP, have large populations of farmers, and an unfavourable result will highlight the ruling party’s inability to meet their needs.

All in all, the results of five state elections will come to light on Tuesday. In addition to the three states, Telangana and Mizoram are also undergoing elections to their respective state legislative assemblies. A hung assembly is also predicted in Mizoram while the incumbent Telangana Rashtra Samithi (TRS) is expected to stay on in power in Telangana.

The results don’t necessarily portend any change in the long-term trajectory of India’s currency and stock markets, but they will likely cause some short-term panic amongst investors and an outflow of foreign funds. While a strong opposition is good for democracy, it can hinder the government’s ability to pass and implement laws.

A lot seems to be riding on the re-election of the business-friendly BJP and Narendra Modi as prime minister. A new national government may mean a departure from the previous government’s economic reforms or way of doing things, bringing with it a certain degree of uncertainty with respect to big business and large investments from foreign entities.


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