Market will soon start acting and reacting to economic fundamentals

It is usual for the markets to get euphoric and peak in the run up to the elections. So, unless there is an extraordinary situation, markets are always soft post the results. We have seen this since the 2004 elections. A similar trend is observed in the run up to the first of a new Government. It is an important policy announcement which sets the economic tone for the next five years, and again the expectations from it are often so high that it is usually followed by disappointment. However, as a rule, over a period the market goes back to basics and starts acting and reacting to the .

While we will continue to analyse the results and its impact over the next couple of days, my initial view on the long-term is that the new Government will focus on addressing critical issues such as employment creation, agriculture growth, and .
The BJP has lost more seats in the rural India than in the urban areas and therefore the focus of its policy making will be . This could be agricultural reforms, labour reforms, and employment generation. In my assessment, doling out freebies don’t really impact election results anymore. If it did, results would have been something else. Several social initiatives were rolled out in Andhra by the earlier government, but the voting outcome does not seem to be driven by it. In my view, remains a key ask for a large section of Indians, mainly in rural areas.

I expect the government’s of economic progress, infrastructure creation, liberalization, rationalization, tax reforms and manufacturing to continue. Similarly, I believe the government will continue to focus on defense and digitization. However, results from cities like Mumbai clearly indicate that tax reforms are a critical issue, and the government may now further focus on both direct and indirect tax reforms, more particularly reforms.

In conclusion, while it is totally understandable that surprises provoke hasty and impulsive reactions which we saw in the market yesterday, the market will in the coming days evaluate the impact of these results on fundamentals. It will analyze the construct under which the new government will be formed, its first policy announcement through the first budget, and its long-term focus areas from an economic perspective. As I said, some of the newer focus areas would include farm reforms, labour reforms, agricultural growth, consumption improvement, and rural infrastructure. All these cumulatively will set in motion a more wide-spread economic growth in the country. This, in turn, will boost the overall economy and the markets. Additionally, the current fiscal situation with the BJP’s focus on remaining fiscally disciplined, the likelihood of a sovereign rating upgrade, a good monsoon and enhanced tax revenues will give comfort to the bond markets in the medium term.

We must thank God that this five-yearly mega-event is behind us. Let us move past the knee jerk reaction from the unexpected election results, get back to our desks and start focusing on the fundamentals which will have a real impact on the markets