Market discounts the RBI turmoil and political loss…

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There were two big setbacks to the central government – resignation by RBI governor and a whitewash in the state elections. Majority of the investors are surprised, wondering why market is not reacting accordingly, as the market is getting more irrational and continues to be buoyant completely discounting these setbacks.

Well, as a concept, market is considered to have the upper-hand indicating the equilibrium of the country, factoring in all the ongoing and future developments. Market works on the power of efficiency, indicating the current and fair barometer of the economic, political and overall environment of the country. Based on efficient theory and rational expectation, an equilibrium is prevailed in the long-term providing a future trend of the market. Having said that, the market can get irrational in the short-term, depending on the liquidity and dimension of the issues.

Regarding the resignation of RBI Governor the market gave more importance to the fundamental value and performance of the institution than that of the individual. Since Urjit Patel’s office bearing, performance was questioned by the market and government, due to continuous changes in stance and increased gap between the government and RBI. Post the excellent work from Raghuram Rajan, it had an inherent well-balanced market, 10 year bond yield declined to 6.20% as risk and liquidity improved. This had increased to 8.20% in October as banking liquidity reduced and depreciation in INR. Currently yield has fallen to 7.40% due to emergency measures, increased OMO operations and reduction in current account deficit. It is also mentioned that quality of decisions and communication skills reduced, while at the same time there are allegations on the government to restrict the autonomy of RBI (no such measures have been implemented). On a positive note, a quick and strong re-appointment of a new governor provided a relief in this case. Still, we feel that market will take some more time to stabilize and note for any change in strategies by the central bank in the next monetary policy.  India has a history of strong bureaucrats heading the RBI with solid performance, currently market is hoping that this change will work in the favour of the economy in the future given Shaktikanta’s credentials and healthy relationship with the government.

In spite of a loss in the political strength, with relevance to the coming general election, why is market ignoring the fact?  Market is given an impression that a good part of this negative news was factored in the muted expectations. But given the fact that BJP lost in all the states, whether a fall of 5.5% from the recent high of 10,941 to 10,333 (Nifty50), completely reflect the risk is unknown. It is possible that this may impact in the future as the litmus test will be the next 4 to 5 months. It also indicates that the market is considering this as a separate issue, more to do with the local issues, anti-incumbency nature of the state’s elections and not with the national leadership quality of the Lok Sabha election.

One important point we have to note is the margin of vote lost by BJP was very thin compared with Congress. BJP voting strength (total no. of votes) continued to be strong, in M.P. BJP received the same percentage of voting share as Congress at 41%, in Rajasthan it was 38.8% compared to 39.3% for Congress while in Chhattisgarh it was 33% for BJP v/s 43% for Congress. Given the dynamic nature of politics in India and since state elections have had limited relevance to the historical pattern to the national election. Market bounced back on the hope of stability in both the issues and end to event risk.

3 COMMENTS

  1. Great observation & market analysis. It’s heartening to see such matured behaviour from the market.Investors too have become more educated, thanks to people like you to provide balanced & right analysis to investors ,helping them to avoid any sort of Panic. Great!

  2. Easing crude price strengthen the Rupee and ignored state election results due to anti incumbency
    is boosting market . Hope this sentiment will continue for two months

  3. A comprehensive analysis of the market trend and the effect of the elections. Hope the analysis comes true as we move to the new year and the new election in May.

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