Stock markets in India to bleed more on BJP's Karnataka setback

The setback suffered by the Bharatiya Janata Party (BJP) in Karnataka will further weigh on the stock market, already grappling with macro economic headwind. The developments there are seen as a key step for galvanising opponents of the ruling party ahead of the general election in 2019.

"The sharp correction (in share prices) that is underway is likely to gather momentum,” said Ajay Bodke, chief executive officer, portfolio management services at Prabhudas Lilladher.

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The benchmark indices shed two per cent last week, their worst weekly performance in two months. Investor sentiment was already been fragile amid a worsening macro situation, with brent crude oil climbing to $80 per barrel, the rupee breaching 68 to the dollar and yield on the 10-year government security inching towards eight per cent.

"The Indian markets are focused on adverse fallout of surging global crude oil prices on the macro economic fundamentals and slow takeoff in corporate earnings,” said Bodke. Had the BJP won the Karnataka confidence vote, it would have helped market sentiment, he added.

The Street was following the Karnataka election closely as a test for the Modi-led BJP’s prospects in the 2019 Lok Sabha poll. Some analysts, however, believe investors will wait for the next round of state elections to judge whether the momentum is still with it. “The impact of the Karnataka political outcome will be short-lived,” predicts V K Vijayakumar, chief investment strategist at Geojit Financial Services.

There will be polls in Madhya Pradesh, Rajasthan and Chhattisgarh in December. Between now and these elections, economics will dictate the market direction, said Vijayakumar. “Of immediate concern will be the impact of crude at $80 on inflation, the interest rate, exchange rate and gross domestic product (GDP) growth rate. With the macros turning unfavourable with the crude spike, the upside to the market is capped.”

In a recent note, foreign brokerage Nomura had said every $10 per barrel rise in oil worsens India’s current account balance by 0.4 per cent of GDP, increases inflation by 30-40 basis points (bps), hurts growth by about 15 bps and worsens the fiscal balance by 0.1 per cent of GDP.

Brent crude was $54 a barrel only a year ago.

Vijayakumar said there could be a huge sell-off in the stock market if crude breached $85 a barrel.