This is an archive article published on December 5, 2023

Opinion Express View on stock market surge: Eye on risk

This following BJP victories in three states shows expectations and perceptions of reduced political and policy uncertainty

stock market surge, state elections, Hindi heartland poll, BSE Sensex, India political scenario, Lok Sabha poll results, general elections 2024, investment house Nomur, indian express news

The GDP data released last week showed that the Indian economy had grown at 7.6 per cent in the second quarter of the ongoing financial year, surpassing expectations.

By: Editorial

December 5, 2023 07:11 AM IST First published on: Dec 5, 2023 at 07:10 AM IST

A day after results of the latest round of state elections showed that the BJP had strengthened its position in the Hindi heartland, sweeping three states, stock markets surged to new highs. The BSE Sensex rose 1,383 points (2.05 per cent), ending the day at 68,865, indicating, possibly, how investors view the political scenario, going into the general elections next year. As investment house Nomura said in a note, “while state election results have not been a good leading indicator of general election results, investors will most likely view these developments positively in anticipation of reduced policy and political risks into 2024”.

This exuberance in the markets can also be traced to recently published data that points towards improving economic conditions. The GDP data released last week showed that the Indian economy had grown at 7.6 per cent in the second quarter of the ongoing financial year, surpassing expectations. Inflation has also moderated in the country, with the consumer price index falling to 4.87 per cent in October, and core inflation, which excludes the volatile food and fuel components, also easing.

There were some fears that a poor performance of the BJP in these elections would increase the risk of fiscally imprudent announcements in the run-up to the general elections. These are likely to have receded to some extent, though whether or not such policies are completely off the table remains to be seen. The external environment also looks encouraging. Concerns over crude oil prices surging following the conflict in West Asia are diminishing.

Crude oil is currently trading at less than $80 a barrel. The US economy is faring better than expected, reducing fears of a hard landing. The 10-year US government bond yield has fallen, after hovering around 5 per cent. Inflation has eased considerably in the US and parts of the developed world.

In the US, it has cooled to 3.2 per cent in October, while in the Eurozone it stood at 2.9 per cent. There are expectations in certain corners of the market of a further strengthening of sentiment owing to these expectations of political and policy continuity and improving domestic and global economic conditions. Foreign investors also appear to have changed tack. After being net sellers in September and October, foreign portfolio investors pumped in Rs 9,001 crore in November.

Later in the week, the monetary policy committee will meet for the last time this calendar year. Most expect the MPC to maintain status quo on rates, considering the current macroeconomic environment. However, markets will be looking to the central bank for guidance on liquidity, its views on the country’s growth-inflation trajectories, and whether and to what extent it revises upwards its growth forecast after the better than expected second quarter data.