Why do Lok Sabha elections impact stock markets?

Shailesh Shriram Tanpure | MAY 20, 2024, 01:02 AM IST

As the Lok Sabha elections enter their last phases, we see a lot of volatility in the stock market for the past few days. This was so evident that Home Minister Amit Shah himself had to step in and advise the public to buy stocks before the election results are announced on June 4, hinting that there will be a jump in prices after his party secures a thumping majority.

The lower voter turnout seems to have caught markets by surprise, given the wider expectation that BJP would be able to garner an overwhelming groundswell of support, as was the case in the previous 2019 elections, according to analysts.

The shift in election rhetoric of the BJP from governance-centered themes to religious and sectarian issues also seems to have spooked markets, with participants trying to comprehend the reasons behind this shift in strategy, market insiders informed.

However, looking at the overall picture, it would be easy to get deceived. If the BJP seems to be getting desperate as the elections progress, it is worth noting that the party fights every election as if their backs are to the walls. What it looks like is that the markets are nervous because they lack information, not because they have insider knowledge. What they think they know is likely incorrect. Indian politics is already complex, and adding stock prices makes predictions even harder.

There are a few factors to be considered when analyzing the impact elections will have on the stock market:

Political Stability: Elections decide who will govern the country. A stable government usually makes investors feel confident, leading to a positive market response. If the outcome is uncertain or leads to a weak coalition, it can make investors nervous, causing market fluctuations.

Investor Sentiment: How investors feel about the election results affects the market. If a pro-business party wins, it boosts confidence and can lead to a rise in stock prices. If the result is unexpected or seen as bad for business, stock prices might fall.

Economic Policies: The winning party’s plans for the economy influence different sectors. Promises of infrastructure projects or tax cuts can boost certain industries, affecting their stock prices.

Market Speculation: Before and during elections, predictions and exit polls can cause market ups and downs. Traders buy or sell stocks based on who they think will win.

Foreign Investment: Foreign investors watch elections closely. A stable, business-friendly government attracts more foreign money into the market, raising stock prices. Political uncertainty can lead to foreign investors pulling out their money, causing prices to drop.

Policy Continuity vs. Change: Investors prefer predictability. If the new government continues existing policies, it’s good for the market. However, if there are sudden changes, it can cause market instability. 

In short, Lok Sabha elections matter to the stock market because they affect political stability, investor confidence, economic policies, and foreign investment, all of which can lead to market movements.

[The writer possesses a fascination with the world of business and the intricacies of stock markets]

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