How markets have fared going into general elections

Markets cheered Bharatiya Janata Party’s (BJP) victory in assembly elections of Rajasthan, Madhya Pradesh and Chhattisgarh on hopes of political stability going into the general elections of 2024. The Sensex and Nifty50 embarked on a record-breaking rally with all sectors of the market handsomely rewarding investors.

India remained the fastest growing major economy of the world in the second quarter of the current financial year with a growth rate 7.6 per cent at the end of September quarter that along with political stability after BJP’s victory boosted bullish sentiment on Dalal Street.

Foreign portfolio investors (FPIs) pouring money in equities also led to an extension of record breaking rally on Dalal Street. FPIs bought shares worth Rs 1,71,107 crore in 2023.

The return on FPIs came after they sold record shares worth Rs 1,21,439 crore in 2022.

Meanwhile, in the run up to 2019 general elections, Sensex gained 6.2 per cent from January to April till the first round of polls took place on April 11. Likewise, in the run up to 2014 general elections Sensex climbed 5.76 per cent.

Equity Markets

Historical data shows a consistent pattern in the behaviour of the Nifty-50 index, showcasing growth in the six months leading up to elections. Over the last five general elections since 1999, the Nifty-50 witnessed a robust average growth of 21 per cent during this period, analysts at Motilal Oswal said in the EcoScope report.

Although immediate fluctuations occurred post-election results, the equity market absorbed them over time, with an average growth of 14 per cent in the subsequent quarter. This trend is observed across mid-cap and small-cap indices as well.

Bond Yields

Analysis of the 10-year government bond yield indicates a tendency to fall in the pre-election period, except in 2004. The average decline was 40 basis points. Post-election, the movements in bond yields gain strength over time, maintaining a consistent direction. Notably, the bond yield fell in three out of the past five post-result periods, reflecting a prolonged impact on the fixed-income market.

Rupee-Dollar Exchange Rate

Examining the Rupee against the Dollar, it was observed that the rupee weakened in the pre-election period in 1999, remained stable in 2004 and 2009, and strengthened in 2014 and 2019. However, the post-election scenario demonstrated an intriguing trend. While the rupee appeared to weaken against the US dollar in the immediate month after elections, the subsequent six months saw a reversal in 2004 and 2009, with rupee strengthening. In 2014 and 2019, where rupee had strengthened pre-election, a post-result weakening was noted.

Foreign Portfolio Investment (FPI) Flows

In line with equity market trends, FPI equity inflows remained positive during the pre- and post-election periods. However, 2019 saw a unique scenario with FPI equity inflows during the post-result six-month period being only 0.2 times that of the pre-results period. This contrasts with 2009 when FPI equity inflows during the post-result period were as much as 8.4 times the pre-results period, reflecting the impact of the 2008 global financial crisis.

While equities tend to thrive in the lead-up, absorbing post-result fluctuations, fixed-income markets and currency exchange rates exhibit distinct patterns with implications for investors and policymakers.