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Surprise twist in India’s state elections deflates stocks rally

The S&P BSE Sensex pared an advance of as much as 1.2 per cent, which had taken the gauge to a three month high

Gulf News

Mumbai: Indian stocks gave up gains and the rupee weakened after the main opposition party said it would ally with a regional outfit to claim control of a key southern state after a vote-count showed Prime Minister Narendra Modi’s Bharatiya Janata Party falling short of a majority.

The S&P BSE Sensex pared an advance of as much as 1.2 per cent, which had taken the gauge to a three month high after trends that showed the BJP was set to form a government on its own. The rupee slid 0.5 per cent to 67.82 per dollar, reversing a gain of 0.1 per cent.

“Investors are wary that the BJP might just fall short of the number required to form the government and this has pulled back the market,” said Sushant Kumar, a fund manager at Raay Global Investments Pvt. in Mumbai. “The volatility will persist until there is certainty of who forms the government.”

The BJP was leading in 104 seats in the 224-member Karnataka assembly, according to the Election Commission of India’s website. The Congress party, which has governed the state for the last five years, was ahead in 78 seats. Janata Dal (Secular), a regional party led by former Prime Minister H.D. Deve Gowda, was ahead in 37 seats in the state, which has a population equivalent to that of France.

The inconclusive outcome may result in a hung assembly, paving the way for the JDS to play kingmaker in forming a coalition government. A party needs 112 seats for a majority in the state assembly.

‘Sentimental positive’

Still, the BJP’s victory in Karnataka is seen boosting its prospects of clinching a second term in next year’s general elections. The ruling party and Congress will next fight in December elections in three key states currently controlled by Modi’s party — Rajasthan, Madhya Pradesh and Chhattisgarh. Karnataka, home to offices of Intel Corp. and General Electric Co., has swung from party to party since 1985.

“The verdict will be seen as a big sentimental positive for the market, which was earlier factoring in a fractured mandate,” said Amar Ambani, head of research at IIFL Investment Managers.

With the Karnataka election done and dusted, investor focus will return to elevated prices of oil — India’s top import — and higher US interest rates, says Anindya Banerjee, a foreign-exchange analyst at Kotak Securities in Mumbai.

Oil threat

“Karnataka’s impact on the rupee is done, and most probably, we’ll get a pullback in the coming days,” he said. “It can be said that the political risk premia has come down, but oil and the US monetary policy threat are not going away. There is a real risk that if oil prices continue to punch higher, the rupee may head to 69 in the next three months.”