India’s electoral impact on the stock market

India’s robust democracy holds elections as an integral part of its fabric, influencing the nation’s sentiment and economic outlook. While equity market performance may vary before and after election results, long-term trends suggest market resilience.

Election and market movements

Following the 2004 Lok Sabha elections, the BSE Sensex, India’s benchmark stock market index, experienced a temporary decline but embarked on a remarkable rally for the next three years, defying initial market scepticism. This highlights the long-term positive impact of structural reforms, regardless of the governing party.

Similarly, the 2009 Lok Sabha elections witnessed a marginal dip in the market immediately following the results, but the index rebounded and continued to grow in the subsequent period. This underscores the market’s ability to adapt and thrive under stable economic policies.

In essence, the Indian stock market has demonstrated resilience in the face of election-related uncertainties, emphasizing the significance of long-term structural reforms as drivers of sustainable growth.

In 1999, the market declined by 2.10% in the month after the elections, but it recovered strongly in the following six months, gaining 40.20%. In 2004, the market experienced a more significant decline of 9.90%, due to unexpected changes in government leadership but it also rebounded in the subsequent six months, gaining 23.10%. In 2009, the market was relatively flat in the month after the elections, gaining a modest 0.20%, but it surged 92.70% in the following six months, this surge was not only due to UPA’s return but also to the economic rebound from 200 Great Financial Crisis (GFC).

In 2014, the market gained 5.00% in the month after the elections, and it continued to rise in the following six months, gaining 39.60%. Policy reforms the Modi government undertook at the initial stage, such as fiscal consolidation and curbing inflation in 2014. In 2019, the market gained 1.30% in the month after the elections, and it continued to rise in the following six months, gaining 16.70%.

Looking ahead

The upcoming general elections in India, six months away, are expected to bring about increased volatility, speculative behaviour, and shifts in investor sentiment in the stock market. While historical trends provide some insights, the unpredictable nature of politics necessitates a cautious yet strategic approach for investors to navigate this period successfully.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.