The tighter-than-initially-predicted Lok Sabha race is weighing down heavily on India's capital market as some quarters of the street fear that a third term for the Prime Minister Narendra Modi-led NDA government may not be as decisive as initially expected.
"We reckon that 400+ seats seem unlikely for the Bharatiya Janata Party-led alliance... The turnout so far is a tad lower and while this could affect the outcome for a few constituencies, it is unlikely to majorly dent the widely expected outcome of BJP returning to power," Phillipcapital India analysts wrote in a note.
This, according to market participants, may impact the government's potential to go ahead with pro-industrial and business policies, a major factor for the recent boom seen in the local stock market.
So far, three phases of the election have been completed and four are to be followed. The 2024 Lok Sabha results, involving 543 constituencies, will be declared on June 4.
Indian equity benchmarks -- Sensex and Nifty -- crashed about 1.5% each on Thursday despite no major negative global cues.
The BSE Sensex closed the Thursday session 1,062.22 points, or 1.46%, lower at 72,404.17 while the NSE Nifty 50 declined 345.00 points, or 1.55%, to settle at 21,957.50. In the past five sessions, Nifty and Sensex have corrected by around 3.5% each.
In all, investors lost more than Rs 7.5 lakh crore in a single session. The m-cap of all BSE-listed firms came down to 3,93,34,896 crore on Thursday against Rs 4,00,69,409 crore a day ago.
"The market is continuously witnessing pressure ahead of the election outcome. We don't have any global reason for this correction, while some uncertainty ahead of the big event is causing profit booking in the market," said Santosh Meena, Head of Research, Swastika Investmart.
Meena added that the Indian market has been largely driven by domestic investors, including both HNIs and institutional investors, for the last few months.
"Now, they are sitting on the sidelines for the last couple of days and taking some profit off the table ahead of the big event, while FIIs are continuously selling in our market, which is pushing the market lower," he said.
Foreign Institutional Investors (FIIs) offloaded equities worth Rs 6,669.10 crore on Wednesday, according to NSE data.
In the broader markets, the BSE MidCap index fell 2% while the BSE SmallCap index declined 2.4%. Among sectors, the Nifty FMCG, Metal, Pharma, and Realty indices closed 2% lower.
From the Sensex basket, only four stocks managed to close in green while 25 witnessed selling pressure. Larsen & Toubro tanked nearly 6% after March quarter earnings. IndusInd Bank, Tata Steel, NTPC, Asian Paints, JSW Steel, ITC, Bajaj Finance, Bajaj Finserv, HDFC Bank and Reliance Industries fell in the range of 2-4.5%.
"The broader market witnessed volatility, underscoring caution on account of Q4 earnings and general election uncertainties, which led investors to stay on the sidelines. We expect the trend to continue in the short term as the market slid below the physiological level of 22,000 (for Nifty)," said Vinod Nair, Head of Research, Geojit Financial Services.
Nair added that the global indices are trading with mixed cues ahead of the Bank of England policy meeting later on Thursday and US inflation figures due next week.
India VIX, which reflects volatility and investors' sentiments in the market, again hit a fresh 52-week high of 19.17 before closing 6.56% higher at 18.20. It has gained for the eleventh consecutive session and is now up 88% from April lows.
"The Volatility Index is also creating some uncertainty among traders and investors. Technically, Nifty has support in the 22,000-21,700 zone. An oversold market suggests a potential bounce around this level. However, for a more significant upward move, Nifty needs to break above the 22,500 resistance level," said Meena.
Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, believed the market correction was driven by a mix of multiple factors.
"At this juncture, we believe that the markets continue to anticipate a stable political regime will ensue. However, it is also important to note that the fiscal year has started on a relatively high base of FY24. Earnings season has been in line with expectations, yet it hasn't spurred noteworthy upgrades in earnings forecasts. Global market conditions continue to remain a mixed bag at best. The markets factored in most of the positives from December 2023, so a modest correction seems warranted," added Kulkarni.
He said the correction is healthy and not primarily driven by pre-election result jitters.
Kulkarni felt that a 2-3% point correction at the index level might be imminent but not overly significant. However, non-quality stocks or companies that disappoint in earnings will see a severe correction, he noted.
