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If the election results bear out the exit poll projections on Friday, the BSE Sensex could rise another 2,000 points over the next few days. However, a host of non-political factors — like the monsoon, inflation, a large subsidy burden, foreign investment inflows and news on India’s fiscal deficit front —will guide markets after that, experts said.
Since September 13 last year, when Narendra Modi was anointed the BJP prime ministerial candidate, the Sensex has run up about 20% to 24,000 levels.
"We believe the new government’s announcements pertaining to fiscal and investment reforms will be critical for market sentiments to be sustained, at least in the short-term," said Dipen Shah, head, private client group research, Kotak Securities.
Reforms are critical for bringing down current account deficit (the gap between inflows and outflows of foreign currency) and fiscal deficit, analysts said. "Markets always factor in good news on the economic front such as fiscal and current account deficit," said VK Vijayakumar, investment strategist, Geojit BNP Paribas Financial Services.
Besides, the wholesale and retail inflation are also important, since "there are no quick fixes to these issues," added Vijayakumar.
While wholesale inflation rate moderated to 5.20% in April from the previous month’s 5.70%, retail inflation rose to a three-month high of 8.59% in April. Industrial output meanwhile fell 0.5% in March.
Foreign institutional investors (FIIs), who have invested $14.5 billion in equities since September 1, 2013, are also likely to move markets. "FIIs are sitting on a return of 40% till date. If market goes up by another 5-10% then they will increase it to almost 50%, which may lead to profit-booking," said Vijayakumar.
The El Nino phenomenon, a weather glitch in the Pacific Ocean, coupled with low monsoon back home this year, may also lead to substantial correction, said Vijayakumar. Insufficient rains could harm crop output and push up food prices, which in turn may limit the Reserve Bank of India’s elbow room to cut rates.
However, considering that the benchmark Sensex has gained 1,500 points in the last three trading sessions on the election fever, the outcome of the polls will certainly be a major determinant. "Markets are rallying based on expectations that the NDA will form the government but it could respond differently post the announcement of exit polls and election results," said JK Jain, research head, Karvy Stock Broking.
Hence, in case you are planning to enter the current rally, invest with a three-four year time horizon, advised Vijayakumar.