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Day before yesterday, BSE Sensex plunged by 3%

– Foreign Institutional Investors are pulling out money from India.

– India is now facing Election fever

– Government is already in deficit, nobody wants to take the risk

Usually the stock market cannot abide by uncertainty, which is why stock market fall during elections, as is happening in India right now

What actually happens?

FII’s start pulling out money from the market because there is uncertainty. If the market collapses because there is no more money, nobody will purchase shares. As a result of that, markets will run without liquidity. This is usually why countries face deficit.

If after the polls the results are positive, it will be positive in the sense that it is going according to the expectations that stocks will go up dramatically and situations will improve. For example, we can talk about the 2009 situation. On May 18, 2009 both Sensex and Nifty hit their respective upper circuits, and trading was halted. After two hours when trading resumed, the indices hit the upper circuit again. Bombay Stock Exchange’s Sensex was locked at 14,272.62, up 2,099.21 points, or 17.24 per cent. National Stock Exchange’s Nifty was locked at 4,308.05, up 636.40 points, or 17.33 per cent.

In light of previous elections, we can assume the economic conditions that might prevail in India after the 2014 elections.

1) Congress: – During the 1991 elections, India was in crisis. During year 1990-1991, Gross Fiscal Deficit of the government was 12.7% percent of GDP and India had double digit inflation of 10.26%.   Foreign exchange reserves had dried up and India could barely finance three weeks worth of imports. Prior to the elections, Sensex was 1361.72 and post elections, Sensex was 2855.43. This was a huge movement in the stock market after the results.

2) BJP: – In the year 1995-1996, the GDP was 7.29%. During one year prior to the Lok Sabha elections in 1996, Sensex posted gains of 15.89%. Prior to the elections, Sensex was 3694.39 and post elections it was 3769.34. It is not a huge movement.

Let us plot a graph now based on the above statements.

#CFA Equity

So based on historical patterns, we can assume the following –

  • If Congress wins the Sensex will go up again
  • If BJP wins, there will not be any significant change
  • If nobody wins, it is difficult to forecast any actual gain or fall in market due to lack of sufficient data.