In the last phase of the campaign for the Lok Sabha elections of 2024, the Prime Minister and the Home Minister of India made predictions regarding the stock market boom on June 4th. But after the election results, the Indian markets fell by almost 6 percent on the same day. Although this decline can be linked to the BJP’s subpar performance, its importance wanes when viewed in the larger context. In the long run, such fluctuations are usually self-correcting and do not pose any threat to the rational investor. History has shown that the stock markets have had both bullish and bearish trends right after the elections but their long term effects are negligible.
“Landslide victories by a single party often correlate with short-term market gains. This phenomenon, observed in elections like 1984, 2014, and 2019, is driven by the investor preference for policy predictability. However, these gains tend to be short-lived as the market refocuses on long-term economic fundamentals,” - Naveen Kaushik Rajan, Senior Director - Investment Products, Windmill Capital.
Let’s look at the key reasons why elections do not have an impact of the proportion that politicians may want us to believe.
Stock markets in India have a greater dependence on factors like economic and financial statistics, corporate performances, world events and moods of the market. For instance, Bombay Stock Exchange (BSE) Sensex, having started from 100 points in 1979 to over 60000 points in 2023, depicts India’s economic and corporate development. Special events like the economic liberalization of 1991 also boosted the market performance for the increase in foreign investment in the economy and other economic liberalizations. While elections can trigger short-term fluctuations, the long-term trend of the stock market is mainly determined by economic and technological factors, and corporate earnings.
Markets are not static but are capable of maneuvering in the context of a shifting political environment. For instance, the 2019 Indian general elections had a small impact on the BSE Sensex, which showed that investors were slightly concerned as they frequently rebalanced their portfolios in anticipation of policy changes that could lead to fluctuations. However, long-term trend in the stock market is more dependent upon more significant and fundamental economic indicators and corporate earnings. From 2000 to 2023 the Sensex has journeyed from 5000 to over 60000 points proving that it is the fundamentals of economic growth and corporate earnings that matter more than short term political events. This emphasis on the fundamentals aids to bring order in the markets even with political instabilities.
Realizing electoral promises in terms of policies is not an easy process in India due to its diverse politics. The legal frameworks’ intricacies, administrative procedures, and the compromises in the majority/minority coalitions cushion the effects of the policies on the stock markets in the short run. For instance, India’s economic reforms like GST which was implemented after electoral mandates were implemented with long drawn out implementation issues with market sentiments. Furthermore, the effectiveness of policies implemented to spur economic growth is not equal. The economic growth of India has been rather moderate with the average of 6-7 percent for the recent years, which points to the impact of policy measures on the market. Hence, although there is a possibility of policy changes in case of a change of government through elections, the process of implementation and the various results, are more complex to be directly associated with market movements.
All in all, it is important to understand that while elections may have an impact on short-term fluctuations in the market, the strength of the Indian stock market lies in its economic and corporate fundamentals. Policy changes that are made after elections experience some degree of difficulty in implementation that prevents a direct influence on the market. The increased and sustained market growth over the years supports the fact that the market is not influenced by electoral cycles but rather a function of economic forces.
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