Hung parliament might spell trouble for markets

April 07 2019

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One of the key reasons the markets touched a life time high recently was due to the strong inflow of foreign funds. Foreign Institutional Investors (FIIs) invested heavily in the Indian equity and debt market. The investment followed hopes of a stable government after the Lok Sabha polls. Now, experts fear a quick reversal of FIIs in case of a surprise result or a hung parliament, spelling trouble for the equities and the rupee.

Experts said that markets movement is showing that it has already priced in the Modi-led NDA coming back to power after the general elections. But if by any chance there is a hung parliament, it will bring down the equity and the currency market very quickly.

An equity analyst, who didn't wish to me named, said: "Market behaviour will depend on which party has the maximum seats and the leader as well."

Discussing the other possibilities apart from a Modi-led government with a nearly similar results in 2014, he said that if Mayawati or Mamata Banejee form a government, the market will surely take a hit. But if the Congress takes maximum seats, the markets will fall but eventually find a balance.

"An unstable government with the Congress is better than an unstable government with Mayawati," the analyst added.

This is because the policies these people pursue will not inspire too much confidence among the investors.

In addition, he explained that markets would not be comfortable with people whose policies are not known at the national level.

A similar situation may be witnessed in the currency market, the experts said.

Anindya Banerjee of Kotak Securities said: "The (FII) inflow will be very robust in 2019 if Modi continues with his mandate. It will have a positive impact in the currency and equities."

But if things reverse and we see a hung parliament, "we will see the currency depreciating very fast. I don't remember when was the last time I saw such a strong inflow of foreign funds".

The two key benchmark index -- Sensex and Nifty -- hit their respective life time highs in the past few weeks, largely owing to the robust inflow of foreign funds inflow.

FIIs had sold heavily late last year, when a mix of global growth slowdown concerns and high crude oil prices along with depreciating rupee had dented investor sentiments.

The inflow becomes especially significant as FIIs acts as a dual support to both the equity and currency. Ever since the strong inflows, the rupee has consistently gained against the US dollar and equities have hit record levels.

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