Karnataka poll result surprised markets; limited upside from here: U R Bhat

A BJP victory in Karnataka opens the door for early general election; markets not factoring that in yet

It is a good performance by the Bharatiya Janata Party (BJP) in the Karnataka Assembly polls and this is being reflected well in the enthusiasm shown by the markets. The upbeat performance at the bourses was warranted, given the surprising outcome.

However, this is as far as the markets will go in the short term. They were already factoring in a good performance – though not exactly a majority – ahead of the poll result. The performance has actually been better than expected.

Going ahead, the markets will now look at domestic and global cues for direction. There are a number of headwinds at the global level that they will have to face now – rising interest rates in the US, geopolitical situation in Iran, crude oil prices and the upcoming US – North Korea meet being some of them. That said, the sentiment will remain upbeat for a few days given the Karnataka assembly election outcome. The Nifty50 can hit 11,000 in the next couple of days.

Earlier, there was a debate that the general elections could be advanced in case the BJP wins in Karnataka. There are chances now that this may happen and we could see a renewed push to the argument to hold general elections alongside the assembly elections in Rajasthan, Chhattisgarh and Madhya Pradesh later this year (2018).

At the current levels, the markets are not factoring in the possibility of the general and assembly elections in these above-mentioned states being held together. BJP forming the government in Karnataka opens the door for an early election, but the markets are not yet factoring that in yet.

ALSO READ: Karnataka election results updates: BJP leads in 118 seats, Congress in 58

Foreign institutional investors (FIIs) will continue to be marginal sellers and this will be compensated by domestic flows. This is how the Indian equity market story will unfold, unless there is a dramatic shift in the economic indicators. Inflation, for now, is under control, GDP (gross domestic product) numbers are reasonably good. It is only the external side where we have a problem in terms of crude oil prices and rupee depreciation. These are two areas that the government will focus now. Once this is fixed, even the FIIs will start coming in.

The markets are worried about these two aspects – a widening current account deficit (CAD) and the pressure on the fiscal situation at a time when the government has to recapitalise the banks. If the government finances the bank recap program, it will definitely put pressure on the fiscal situation and the markets are not prepared for this.

If everything goes well for the economy, the markets can reach new highs. That said, the upside for the Nifty50 index remains capped at 11,500 levels. On the downside, it has support at 10,300 levels and then at 9,500 levels.