The Bharatiya Janata Party's (BJP) decimation in the Delhi assembly election has raised fears Prime Minister Narendra Modi may slow down the pace of his liberalising economic agenda, but investors are likely to hold their nerves for signals to the contrary in the national budget due later this month.
Results from the vote showed that neither the cosmo-urban middle class nor the low-income migrant working population of Delhi identified with Modi's agenda of governance of the past nine months that saw some small-bore reforms but hardly any movement in key areas such as job creation and price rise.
In a signal of investor discomfort with a victory for Aam Aadmi Party (AAP), the Bombay Stock Exchange shed 1.7% on Monday after most exit polls gave Arvind Kejriwal's party a clear majority in Delhi.
But as the results came in on Tuesday, the Sensex surprised everyone by rallying positively in morning trade, a trend attributed by analysts to the willingness of investors to wait for the Union budget, a make-or-break opportunity for Modi to dispel doubts over his reform credentials.
"Investors have come around to the view that there were probably local issue at play, local organisational issues for the BJP, so this is not a referendum on the Modi government," says Abheek Barua, consultant at economic think tank ICRIER.
"They are hoping the results from Delhi will not distract the government's economic agenda."
In the very least, though, the results may make it difficult for Modi to administer the "bitter medicine" he had warned of to nurse the economy back to health from high inflation and the worst slowdown in a quarter century.
That would have included measures in the budget to trim subsidies on food and fertilisers, streamlining corruption-ridden welfare schemes such as the National Rural Employment Guarantee Act (NREGA) as well reforming the banking sector.
While most analysts rule out the possibility of Finance Minister Arun Jaitley revisiting his budget proposals in the light of the election results in Delhi, the possibility of abandoning all populism may have become more difficult now, especially keeping in view the assembly elections in Bihar later this year.
There is little clarity on AAP's position on individual economic reforms, although the party has not been dogmatically opposed to economic liberalisation, especially to increase the ease of doing business. The AAP has opposed some reforms, such as FDI in retail, but has indicated a willingness to simplify VAT structures and licensing procedures. But most importantly, the party has grown on the back of an anti-corporate image.
For the BJP, the loss in Delhi has a larger political implication. It is a setback to Modi's efforts to consolidate power in the Rajya Sabha to push through tough economic decision, including the contentious ordinance on land acquisition.
"The numbers in the Rajya Sabha are vital, so the BJP is under pressure to win the states," says Barua. "That is a more real stumbling block for reforms."