New Delhi: Threat of political uncertainty and spiraling crude prices led to a sharp correction in Indian stocks on Monday. Stock markets gyrated to Congress-DMK ties with the later threatening to quit the central government over a stalemate in seat-sharing arrangement for the Tamil Nadu polls. After a weak opening, the benchmark stock market index Sensex lost over 2% by mid-day.
However, markets pared losses in the last hour of the trade on positive opening in European markets and reports of Congress opening up a channel of communication with the DMK.
Sensex: 18,222, –1.4%
Nifty: 5,463, –1.3%
Stoxx: 50 2,951, +0.07%
FTSE 100: 6,006, +0.28%
Apart from FMCG, all the sectoral indices on the BSE closed in red. After easing for two days, Brent crude oil prices rose to $117 a barrel as unrest in Libya intensified.
BSE Auto: 8,691, –2.5%
BSE Capital Goods: 12,644, –2.36%
BSE Realty: 2,042, –1.6%
BSE Bankex: 12,245, –1.6%
Concerns about the continuation of economic reforms if DMK quits government led to the broad based selling in the stock markets. Any instability in the ruling alliance will weaken the government’s ability to take-up economic reforms bills such as new banking licenses, increasing FDI limit in insurance, opening up retail for FDI and reign-in fiscal deficit. Even though there is no immediate threat to the government, any re-alignment in the ruling UPA alliance can significantly change political equations and alter the government’s focus.
Jyotivardhan Jaipuria and Anand Kumar, analysts at Bank of America Merrill Lynch, are not too overtly worried
One worry for the market is will reforms suffer given that the numerical strength of the UPA Government reduces further. This makes the Government more dependent on the BJP probably in terms of reform legislation. However, on the positive side, the Prime Minister may have greater flexibility in giving key infrastructure ministries to people of his choice since he had indicated that necessities of coalition politics had slowed decision making.
With crude prices again trending upward, investors are worried about the central bank raising interest rates. More clarity on that would emerge 10 days from now when RBI announces its credit policy review.