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‘BJP’s loss could be in the price, fiscal worries may grow’

Money managers said that BJP’s loss in the state has been factored into 2% fall in the indices.

, ET Bureau|
Updated: May 21, 2018, 09.48 AM IST

BJP’s BS Yeddyurappa announced his resignation on Saturday ahead of the floor test to prove majority in the assembly, bringing an end to a dramatic week in local politics.

Mumbai: The Bharatiya Janata Party’s short-lived rule in Karnataka will add to the woes of the Indian stock market, already grappling with oil at $80 a barrel and a local currency that breached the mark of 68 to a dollar last week. Market participants worry that the BJP-led central government may resort to populism to improve the party’s prospects in the other major state elections later this year and the crucial national elections in 2019 that may weigh down the fiscal condition, which is under strain because of rising oil prices.

BJP’s BS Yeddyurappa, who had been Chief Minister of Karnataka for all of two days, announced his resignation on Saturday ahead of the floor test to prove majority in the assembly, bringing an end to a dramatic week in local politics. The Indian National Congress-Janata Dal (Secular) alliance will form the government in Karnataka.

Money managers said the silver lining is that BJP’s loss in the state has been factored into the 2 per cent fall in the indices, but the country has more pressing issues like oil prices and a weakening rupee.

“The market fall of the last two days, in some sense, factored in the potential political scenarios. However, the market is likely to factor in fundamentals and non-political issues from here,” said Nilesh Shah, managing director at Kotak Mahindra Asset Management Company. “The focus will be on oil which is threatening to go above $80, rising interest rates in the US as well as India, and the tariff war between the US and China,” said Shah, adding that the market will be range-bound with a negative bias till it moves into the June quarter results season and the advent of monsoon.

The Nifty had rallied from a low of 9,951.90 to over 10,800 recently, but the market has given up some gains over the last few days as worries about macro headwinds and political uncertainty in Karnataka took hold. The Nifty ended down 86.30 points, or 0.8 per cent, at 10,596.40 and the Sensex ended down 300.82 points, or 0.9 per cent, at 34,848.30 on Friday.

Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services, believes that Saturday’s political developments in Karnataka will have no bearing on elections in Madhya Pradesh, Chhattisgarh and Rajasthan, but oil prices and valuations will surely weigh on markets in the near term.

“Oil will play a bigger role than anything else. The rupee is also weak,” said Agrawal.

India imports 80 per cent of its oil requirements. With global crude oil prices rising, the demand for dollar has put pressure on the rupee. The government’s reluctance to increase retail fuel prices in the wake of the higher crude could also impact the government’s finances.

CLSA’s India strategist Mahesh Nandurkar expects the likely pro-rural stance in policies by central government and various state governments further pressuring the macro situation.

“No matter who forms the gov’t (government), the Central and various state governments will turn more pro-rural as the 2019 federal election approaches. This could keep the macro under pressure,” said Nandurkar in a note.

More weakness is in store for midcaps in particular, which are over-valued despite the sharp fall.

“Stocks which have run mainly on hope than on fundamentals will see more correction. About 366 out of the top 1,000 companies are down over 30 per cent from their 52-week highs,” said Shah of Kotak Mahindra AMC.

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