Bharat Rajeswaran and Ankur Banerjee
MUMBAI/SINGAPORE (Reuters) – Indian shares suffered their worst intraday fall since March 2020 on Tuesday and foreign investors sold the most on record as general election vote count trends suggest Prime Minister Narendra Modi’s alliance is unlikely to will win, according to the vast majority of exit polls.
With more than half the votes counted, Modi’s own Bharatiya Janata Party (BJP) is unlikely to win a majority on its own in the 543-member lower house of Parliament and will need allies in the National Democratic Alliance (NDA) to form a government.
This could lead to some uncertainty about economic policies, such as the push for investment-led growth that has been a cornerstone of the Modi government. In the fiscal year ending March 2024, the Indian economy grew by 8.2%.
“The key question is whether the BJP can maintain a single-party majority. If not, can her coalition deliver economic development, especially infrastructure?” said Ken Peng, head of Asia investment strategy at Citi Global Wealth.
The NSE Nifty 50 index closed 5.93% lower at 21,884.5 points, while the S&P fell 5.74% to 72,079.05. Earlier in the day, the index fell 8.5% after hitting a record high on Monday.
At the day’s low, the indices saw their biggest intraday drop since March 2020, when stocks were hit by the first lockdown during the COVID pandemic.
“Due to dependence on coalition partners, the upcoming NDA government may shift focus towards a welfare-oriented approach rather than focusing on reforms as part of the July Budget,” said Puneet Sharma, CEO and fund manager of Whitespace Alpha.
Indian markets are likely to move lower now due to higher risk perceptions, say analysts at brokerage Emkay Global, which believes complex reforms such as changes to land and labor policies and privatization of state-owned enterprises are “off the table.”
Exit polls over the weekend predicted a big win for Modi’s NDA, sending markets to record highs on Monday as investors were buoyed by expectations of robust economic growth.
As of late Monday, benchmark indices had more than tripled since Modi became prime minister in May 2014.
Foreign investors, who poured $20.7 billion into Indian stocks last year but pulled out before the election, were widely expected to return to buying if Modi’s alliance wins a decisive mandate.
Foreign institutional investors (FIIs) sold a record Rs 124.36 billion (about $1.5 billion) of Indian shares on Tuesday, according to preliminary data released late Tuesday.
They bought shares worth a total of 68.51 billion rupees ($824.4 million) on Monday.
“What’s important in our view is that the NDA will return to form the next government, which will represent policy continuity,” said Mike Sell, global head of emerging markets equities at Alquity in London.
“Whether they win by 20 or 120 votes will determine the extent of structural reforms that can be introduced, but ultimately a win is a win and the growing positivity around India’s structural growth story will not diminish.”
The lack of clarity over the NDA’s victory has seen intraday volatility in the stock index rise to its highest level in 26 months.
Traders said selling by high-frequency traders accelerated the decline, with the sharp drop triggering margin calls.
The market witnessed a significant correction due to margin calls as retail investors held highly leveraged positions, said Rupak De, senior technical analyst at LKP Securities.
Some investors saw the decline as a buying opportunity.
“Regardless of the final vote count, the Indian economy will continue to benefit from long-term tailwinds from favorable population demographics and ongoing geopolitical tensions between China and the US,” said Gary Tan, portfolio manager at Allspring Global Investments.
Investors expect the Modi government to continue to focus on turning the country into a manufacturing hub, a project that has attracted foreign companies including Apple (NASDAQ:) and Tesla (NASDAQ:) to set up manufacturing as they diversify outside China.
The rupee ended at 83.53 against the US dollar, down 0.5% on the day, its worst one-day fall in 16 months. Benchmark yields rose 10 basis points on the day, their biggest daily rise in eight months, ending at 7.0382%.
($1 = 83.4800 Indian rupees)