Mumbai

Results due on Monday of provincial elections in Gujarat will determine the trend for Indian shares in the coming week, as well as for the near term, with pundits convinced the outcome would have a big influence on how voters would swing in national polls that are due in early 2019.

Shares rose on Friday after all exit polls, released late on Thursday by television channels after voting had ended, suggested the ruling Bharatiya Janata Party (BJP) would win a clear majority, swatting away rural distress, economic slowdown and public anguish with demonetisation and teething issues with the launch of Goods and Services Tax (GST) — all big talking points for the opposition Congress party.

“If the BJP scores a decisive victory, the bulls will have their tails up,” said a foreign fund manager, who did not want to be named. “It would blow away some of the negativity that has crept in, but the economy faces strong headwinds and all eyes will be on the forthcoming budget.”

India’s annual budget is scheduled to be unveiled on February 1 and a strong win for the BJP in Gujarat, despite a spirited challenge by the Congress-led coalition of regional satraps, is expected to embolden the government to press ahead with clean-up, notably in the banking sector and public sector companies, pursue reforms, focus on reviving private investment and jobs, he said.

The star campaigner for the BJP in Gujarat was Prime Minister Narendra Modi, while Rahul Gandhi, newly elected president of the Congress party, shepherded the opposition, making the election to the 182-member local assembly of the western state a preparation for other state polls due next year and the national election that must be held by May 2019.

“Make no mistake,” Surjit Bhalla, a member of the prime minister’s economic advisory council, wrote in a column in the Indian Express. “The Gujarat election result is important, and particularly so for the Congress. A close fight will signal its revival, and signal to the BJP that Modi’s personal popularity will no longer dominate the vote, as the electorate gets increasingly concerned about a slow growth economy.”

“It is now conventional wisdom that if the BJP were to win by less than a 100 seats, it would be seen as having lost the election. If this happens, it is a safe bet that the economy, vikas (development), will be the talking point of post-match analysis — in the media, among politicians, and among economists.”

The median of five exit polls suggested the BJP would get 110, with one poll giving it 135 seats. The top-30 Sensex and the 50-share Nifty gained 0.6 per cent each over the week, to 33,462.97 and 10,333.25 respectively, in anticipation of a BJP victory after the market had fallen earlier in the week.

From Monday, private-sector lenders Yes Bank and IndusInd Bank will become constituents of the top-30 Sensex, replacing drugmakers Cipla and Lupin.

Inflation, rates

Exit polls also show the BJP dislodging the incumbent Congress in Himachal Pradesh when results are released on Monday, adding another feather to Modi’s cap. More state elections are in the offing before the 2019 general elections, including in the big states of Rajasthan, Madhya Pradesh and Karnataka.

The BJP’s performance in the upcoming state polls will serve as a litmus test of its popularity considering recent policy changes and reforms, particularly the GST, investment bank DBS said in a report, adding that the situation called for investor caution.

While political factors would dominate financial markets, there are formidable headwinds on the economic front. Retail inflation in November accelerated to a 15-month high of 4.88 per cent, well beyond the central bank’s threshold of 4.0 per cent, pushed by a steep rise in vegetable prices as well as higher fuel costs.

This would be a tricky situation for the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) that has the mandate to set policy with primary responsibility to keep prices under control. Though economists believe that the central bank would likely hold rates at a seven-year low of six per cent at its next review in February, the odds for a hike are increasing.

“We now see 30 per cent chance of a precautionary rate hike in the February policy itself, with the MPC facing an acute trade-off between sluggish growth and rising inflation for the first time in its short existence,” Citigroup analysts wrote in a note.

Undoubtedly, the RBI faces a tough call to balance sluggish growth and rising price pressures. Food costs are unlikely to ease anytime soon with unseasonal rains in October damaging crops. Data released this week showed industrial production expanded at a lower-than-expected 2.2 per cent in October.

A third rate increase by the US Federal Reserve this year, and more raises likely in 2018, should slow down portfolio flows into emerging markets such as India.

Divestment, Vedanta

Meanwhile Finance Minister Arun Jaitley said the government would exceed the Rs725 billion divestment target for 2017-18, after years of falling behind the budgeted plan. Robust stock market with benchmark indices up a quarter this year has paved the way for the spate of initial public offers and secondary stock sales.

“This is going to be the first year in history where we are going to significantly overtake disinvestment target,” he said at the annual general meeting of the Federation of Indian Chambers of Commerce and Industry.

This would be good news for the government, which is facing a shortfall in revenue and ballooning expenditure.

Divestment proceeds up to December 4 this financial year reached Rs523.89 billion, he said, including in GIC Re and New Indian Assurance. The fiscal year runs from April to March.

One divestment that will be closely watched would be the sale of Air India, the debt-ridden state carrier. The government has appointed advisers for the sale, and Jaitley said the plan is moving “expeditiously” but did not set a date.

Credit Suisse began coverage of oil and metals firm Vedanta Ltd with an “outperform” rating, with a price target of Rs345, implying a potential rise of 16 per cent to Friday’s close of Rs298.

Volume expansion in oil and zinc as well as improved profitability in aluminium should drive the company’s fortunes. Aluminium business is most important for the company’s incremental gains, the securities house said, adding that global supply-demand function and surging raw material prices augurs well for aluminium prices too.

In comparison with global metal and mining conglomerates Vedanta was not expensive, it said.

— The writer is a journalist based in India.