How instructive to watch the cold, ruthless logic of the market at play around the Indian election. It turns out that investors are ready to dump the juicy equity and bond paradise that Modi lifted to the stratosphere – stock market reached record levels, briefly overtaking Hong Kong’s earlier this year as the fourth largest in the world – if BJP falls short of its own boast of “abki bar, char so par”!
In fact, smart money has already been scaling down Indian market exposure amid low voter turnout and signs of BJP’s failure to break into traditionally unwelcoming southern states like Kerala and Tamil Nadu and, more seriously, rumours that all is not well in the “Hindi belt” stronghold either.
Foreigners pulled $3.5b from local shares in May alone as part of the bigger $6.3b stock and bond market rout for the quarter. And it says a lot that the market’s fear barometer, the India VIX Index – a gauge of likely market swings over the next 30 days – has already doubled from its April low.
Implied volatility in the one-month period of the dollar-rupee options curve also crossed levels seen in the three-month maturity, inverting the curve, according to Bloomberg. Volatility in the short tenor has been rising since the long election process started last month and reports of a lower-than-expected turnout, especially in BJP’s backyard – widely interpreted as reflecting voter discontent – rattled the headlines.
This investor apprehension does not stem from market valuations or fundamentals at all; they are a text-book lesson in how behavioural finance – the broad interplay of investors, traders and speculators reacting to fundamentals and wider related and unrelated noise – has become the main driving force of the world’s biggest and most liquid capital markets.
Modi has claimed that BJP and its allies would win 400 seats in the country’s 543-seat parliament this time, up from 350 last time. Supporters and investors are counting on this “historic mandate” to realize Modi’s ambition of attaining developed nation status by mid-century by following measures like implementing a nation-wide sales tax and overhauling corporate governance standards for state-owned firms with labour and agriculture reforms, which require “substantial political capital”.
Also, unlike his opponents who’ve promised a dramatic expansion of the welfare state, Modi intends to borrow to expand productive capacity, ensure a stable currency and make India’s rupee-denominated government notes more attractive. “Borrowing dollars to by Asian bonds has been unprofitable almost everywhere else this year. India has been a notable exception”, Bloomberg reported.
But that’s not all he intends to do with that mandate, which would also give his party and allies the power to amend the constitution. BJP has never made a secret of its desperation to remove protections for ethnic and religious groups that have been historically discriminated against in the world’s largest democracy. But that’s not even a small distraction for value investors looking for buy-and-hold returns or speculators who’re always happy to fuel and ride a bull market whenever and wherever possible.
There’s a ban on exit polls till voting is completed on June 1, so there’s no way of really knowing if BJP is on target. Yet the market, which clearly favours another Modi wave, is smelling fear. Hence the scramble from the big man himself, conducting snap tours of crucial states and ratcheting up anti-Muslim ‘ghusbaithiay’ rhetoric, the classic draw in the pro-Hindutva, cow vigilante BJP heartland.
It’s ironic that big money warning of an equity selloff and rupee drop to 84-85 to the dollar in case of a weak BJP-led coalition government and a worse fall if there’s a change at the top is also counting on Modi’s expertise in exploiting racial hatred and deepening religious divides in one of the world’s most diverse societies to keep the profits coming.
If spitting venom in last minute campaigning pays off, the market will shower India with an investment inflow that will be the envy of the world. And if it doesn’t, it’ll simply park elsewhere till it’s time to bottom fish here again.
Copyright Business Recorder, 2024