At the low of the day, the indexes suffered their biggest intraday decline since March 2020, when stocks were hit by the first COVID-19 lockdown.
Indian shares suffered their worst intraday decline since March 2020 and foreign investors sold the most on record as general election vote counting trends suggested Prime Minister Narendra Modi’s alliance was unlikely to win an overwhelming majority would achieve what was predicted in the exit polls.
With more than half of the votes counted on Tuesday, Modi’s Bharatiya Janata Party (BJP) appears unlikely to win a majority in the 543-member lower house of parliament on its own and will likely need allies in the National Democratic Alliance (NDA) to form the party. government.
That could lead to some uncertainty over economic policies, such as the push for investment-led growth that has been the cornerstone of the Modi government’s rule. The Indian economy grew by 8.2 percent in the financial year ending March 2024.
“The key question is whether the BJP can maintain a one-party majority,” said Ken Peng, head of investment strategy for Asia at Citi Global Wealth. “If not, would her coalition be able to achieve economic development, especially in infrastructure?”
The NSE Nifty 50 index closed 5.93 per cent lower at 21,884.5 points, and the S&P BSE Sensex fell 5.74 per cent to 72,079.05. The indexes fell as much as 8.5 percent earlier in the day after hitting record highs on Monday.
At the low of the day, the indices saw their biggest intraday decline since March 2020, when stocks were hit by the first lockdown during the COVID-19 pandemic.
“Due to the dependence on coalition partners, the incoming NDA government may shift its focus to a welfare-oriented approach instead of concentrating on reforms in the July budget,” said Puneet Sharma, CEO and fund manager at Whitespace Alpha.
Indian markets are now likely to depreciate due to higher risk perception, said analysts at brokerage Emkay Global, which believes difficult reforms such as changes in land and labor policies, along with privatization of state-owned enterprises, were “off the table ”.
Exit polls last weekend predicted a major victory for Modi’s NDA, catapulting markets to record highs on Monday as investors were buoyed by expectations of continued economic growth.
‘Policy continuity’
Benchmark indexes have more than tripled in value since Modi became prime minister in May 2014.
Foreign investors, who poured a net $20.7 billion into Indian stocks last year but pulled out ahead of the election, were widely expected to turn to buyers if the Modi alliance wins a decisive mandate.
On Tuesday, foreign institutional investors (FIIs) sold a record 124.36 billion rupees (about $1.5 billion) worth of Indian equities, according to provisional data released on Tuesday evening.
They had bought shares worth a net 68.51 billion rupees ($824.4 million) on Monday.
“In our view, the most important thing is that the NDA returns to form the next government, which represents policy continuity,” said Mike Sell, head of global emerging market equities at Alquity in London.
“Whether they win by 20 or 120 will impact the amount of structural reform that can take place, but ultimately a win is a win and the increasing positivity around India’s structural growth story will continue unabated.”
The lack of clarity on the profit margin for the NDA pushed intraday volatility on the stock index to a 26-month high.
Traders said selling by high-frequency traders accelerated the decline and the sharp drop led to margin calls.
The market is witnessing a significant correction due to margin calls as retail investors held heavily leveraged positions, said Rupak De, senior technical analyst at LKP Securities.
Some investors saw the decline as a buying opportunity.
“Regardless of the final election outcome, the Indian economy will continue to benefit from the long-term tailwinds of 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 will continue to focus on turning the country into a manufacturing hub – a project that has prompted foreign companies including Apple and Tesla to set up production as they diversify outside China.
The rupee ended at 83.53 against the US dollar, down 0.5 percent on the day, marking its worst single-day decline in 16 months. The yield on 10-year government bonds rose by 10 basis points that day, the largest daily increase in eight months, to end at 7.03 percent.