Though markets will cheer the Bharatiya Janata Party (BJP) winning the state elections 3-0, including decisive wins in Rajasthan and Madhya Pradesh where the party got more than three-fourths of the seats, the very close fight given by the Aam Aadmi Party (AAP) in the capital could crimp the marketís party later today. Investors will cheer the possibility the strong show in the assemblies will get translated to the general election in less than six months ó the BJP holds 28 Lok Sabha seats of the 72 from these four states.
But the possibility, even if an outside one, that the AAP can spread to a few more cities could make the market mood turn cautious. Indeed, while the markets rallied smartly intra-day on Thursday after Wednesday eveningís exit polls signalled the BJP might make a clean sweep in four states, by the close of the session both benchmark indices had pared their gains.
The Street has been betting big on Narendra Modi, chief minister of Gujarat and the prime ministerial candidate for the BJP. Indeed, much of the marketís resilience over the past few months has been attributed to expectations that the BJP, led by Modi, would form a strong stable government at the Centre.
In early November, Goldman Sachs wrote that the macro challenges India faces in terms of external and fiscal imbalances, high inflation and tight monetary policy ďare being dominated by expectations of political change, specifically that the BJP-led National Democratic Alliance (NDA) could prevail in the next parliamentary elections that are due by May 2014Ē. After the exit polls, Merrill Lynch observed, ďThe market is looking for a strong, stable government post 2014 elections and it seems that these results will likely make the market think that BJP could emerge as the lead party in the 2014 elections.Ē
Much of the rally has been psychological. Despite no sign of investments picking up meaningfully, the BSE capital goods index has been a big gainer in anticipation of the new government being able to spur