The rise of the Aam Aadmi Party is making investors in the Indian stock market jittery. Since December 9, 2013, when it touched an all-time intra-day high of 21,483 a day after assembly election results were announced, the benchmark BSE Sensex has lost more than 3% amid heavy volatility.
“The main political factor that will affect the markets will be AAP’s performance in the Lok Sabha elections. So, even if it were to reduce the expected BJP tally by 20 seats, there is a possibility of a hung Parliament. This is creating political uncertainty and leading to volatility in the equity markets,” said Amar Ambani, head of research, IIFL, a leading market research portal.
In the three months prior to the announcement of the assembly election results, from September 10 to December 6 (the last trading day before results were announced on December 8), the Sensex had gained 5% from 19,997 to 20,996.
Investors and analysts, both foreign and Indian, had attributed it to hopes that the 2014 Lok Sabha elections would pave the way for a BJP-led government that would be business-friendly and initiate reforms that would drive economic growth.
But the formation of the Arvind Kejriwal-led AAP government in Delhi, the stream of high-profile professionals joining the party’s ranks across India, its decision to contest the Lok Sabha polls and its left-of-centre politics, have hit the buoyant mood.
“After the Delhi elections, the emergence of support for AAP at the national level has created uncertainty over whether a single party can get a mandate as strong as was being anticipated earlier,” said Vaibhav Agrawal, vice-president, research, Angel Broking, a leading broking firm.
Foreign institutional investors (FIIs), which had pumped in $20 billion (Rs 1.25 lakh crore) last year and had largely led the rally in Indian stocks in the last quarter of 2013, have started booking profits. They have pulled out about Rs 1,000 crore so far in 2014 and are expected to adopt a cautious approach till the elections.
“The political scene in Uttar Pradesh and Bihar is another problem area. There is uncertainty over how many seats the BJP will win in these two states. And that is affecting market sentiment,” Ambani said.
Apart from politics, future action by the US Federal Reserve on its QE3 tapering calendar and the Reserve Bank of India’s action on the interest rate front will influence the direction of the market over the short to medium term.