Likely market reactions to trust vote

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Mumbai July 18:: The parliament will hold a confidence vote on Tuesday, which will decide the fate of the Congress party-led government.

Following are analysts' views on current market expectations for the most likely outcome and how the markets would react to different results.

The rupee was trading at 42.8350 per dollar on Friday. The stock market was holding at 13,175 points, up 0.45 per cent and the benchmark 10-year bond yield was at 9.11 per cent.

SCENARIO 1 - GOVERNMENT WINS VOTE

RESULT: Government wins confidence vote, stays in power, prospect of early election recedes.

This is the scenario markets are mostly expecting even if the ruling coalition wins the confidence vote by a narrow margin. A narrow win would hamper its ability to push through big economic reforms, but analysts say the government may in any case not try to push through big-ticket changes in its last months in office.

REACTION: Mild short-lived boost to stocks and rupee likely; government bond prices may ease on fiscal slippage concerns as government may try to implement a pay hike for federal employees. This outcome returns markets to pre-vote status quo, so inflation, interest rates, slowing growth and oil price concerns move back to the fore.

COMMENTS:

A. PRASANNA, ECONOMIST AT ICICI SECURITIES, MUMBAI:

"The markets to some extent (are) pricing in a Congress party win and a win may provide a boost to the stock market on expectations the government may speed up reforms before it faces national elections next year."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

"The withdrawal of the left parties itself has been perceived as a positive thing by the market participants, and there are good chances that the government will pass this vote. Even if it is a minority government, it will be in a position to go ahead with the nuclear deal so that will give a positive boost to market sentiment.

"The support from left block was the major barrier in carrying out reforms so whatever the outcome the markets will react positively."

SHUBHADA RAO, CHIEF ECONOMIST AT YES BANK, MUMBAI:

"If the government wins, then status quo at current levels for all markets."

ARUN KEJRIWAL, STRATEGIST AT RESEARCH FIRM KRIS, MUMBAI:

"If the government wins then there will be some buoyancy in the market as it kills the uncertainty. But undue influence from certain political and business sections would prevail and the markets may not like that."

DEVEN CHOKSEY, CHIEF EXECUTIVE, BROKERAGE K.R. CHOKSEY, MUMBAI:

"There is a 70-80 per cent chance the government will survive. And (stock) market is not viewing it too seriously for a move up. In any case, the general consensus is we are already bottoming out."

SCENARIO 2 - GOVERNMENT LOSES VOTE

RESULT: Government loses vote. Becomes caretaker government until early elections are called, likely by the end of this year. This will fuel political uncertainty at a time of high inflation, high interest rates, signs of fiscal strain, slowing growth.

REACTION: Likely short-term selling pressure on stocks, bonds and rupee. Later bond prices might gain a little on view new government could defer federal employee wage hikes until fiscal 2009/10. But political/reform uncertainty means market sentiment likely to remain subdued until elections are held.

COMMENTS:

A. PRASANNA, ICICI SECURITIES:

"It may be negative for the stock market and the rupee as it would spell uncertainty on the economic reforms front in the near term. But it may prove to be slightly positive for the bond market if the new caretaker government postpones the pay commission implementation."

SHUBHADA RAO, YES BANK:

"If they lose the vote, then bond yields would rise by 25 basis points, equity markets would fall by 500-600 points and rupee may weaken to around 43.25-43.50."

ARUN KEJRIWAL, KRIS:

"If the government falls, then there will be buoyancy again but after a brief period of pain, maybe a few hours or a few days."

DEVEN CHOKSEY, K.R. CHOKSEY: