Impact of Elections on the Markets and Mutual Funds

Historical Perspective: Election Years and Market Movements

Here’s how previous elections in India had an impact on the share market:

• 1989 - Beginning of the Coalition Era

India’s 1989 elections started the coalition era, with the National Front coalition government taking over. This period saw high market volatility and political turmoil.

The anti-corruption measures and unpredictability of reforms under the new regime failed to stabilise the economy immediately. This period shows how elections and shifts in power can disrupt market sentiment.

• 1991 - Congress Returns with Reforms

In 1991, after the assassination of the then Prime Minister Rajiv Gandhi, there was high market volatility and pessimism. Nevertheless, the government led by P.V. Narasimha Rao introduced new economic liberalisation policies.

These reforms targeted opening up the Indian economy and helped boost market confidence, leading to economic growth and recovery after the volatile election period.

• 1996-1998 - Unstable Coalition Governments and External Shocks

Between 1996 and 1998, frequent government changes and unstable coalitions led to a lack of policy coherence and perpetual political disruption. This period was also marked by various external economic pressures.

During this period, market confidence deteriorated, resulting in muted returns and bearish sentiments.

• 1999 - Stability with NDA, Markets Rally

In 1999, the National Democratic Alliance (NDA), led by the BJP, came to power, injecting expected stability into the stock markets. The Sensex jumped by 7% after the election results and continued to rally for the next three months.

The NDA’s decisive majority brought political stability and a pro-growth agenda, emphasising structural reforms and economic liberalisation policies.

Despite global events, such as the 9/11 terror attacks, the economy initially enjoyed strong GDP growth, though a market correction occurred after a few years.

• 2004 - UPA’s Unexpected Win Shocks Markets

In 2004, the Congress-led United Progressive Alliance (UPA) defied exit poll predictions, resulting in an initial 12.24% market slump on the day of the results. However, the markets rebounded 8.3% the next day and closed 16% higher over the next five days.

The initial market turbulence was due to the surprise of the UPA’s win, but markets quickly recovered as the new administration focused on economic reforms and aimed for 8% GDP growth.

• 2009 - UPA’s Re-Election Spurs Massive Rally

When the UPA coalition secured a second term in 2009, markets were astonished by the strength of the rally. The Nifty surged 17.74% on the day of the results before settling down slightly.

Over the next five days, the index experienced some profit-booking but closed around 2% higher overall. Despite the initial optimism, the UPA’s second term was marred by corruption scandals and accusations of policy paralysis, which dented investor confidence.

• 2014 - Modinomics Boosts Market Optimism

The BJP-led NDA's victory in 2014 sparked renewed market optimism, significantly reducing volatility from 17.96% to 9.1%.

Expectations of economic reforms drove a notable market rally, with the markets reaching record levels. However, the growth rate of around 40% over four years was considered moderate, influenced by factors such as global oil prices and a weaker Indian rupee.

• 2019 - Second Term for Modi Ensures Policy Continuity

The BJP’s re-election in 2019, extending Modi’s premiership, was met with positive market reactions, though not as euphoric as in 2014. The Nifty ended the election day down by 0.69% but rebounded with a 1.6% increase the following day.

Investors welcomed the prospect of continuity of the policy and deeper reforms in areas like manufacturing, infrastructure, ease of doing business, labour laws, and privatisation. However, challenges like economic growth issues and global trade wars tempered market rallies.

Do Elections Impact Your Investments?

Historically, election results have sometimes defied stock market expectations. For instance, in 2004, the market anticipated the NDA government returning to power. However, the UPA government took over, leading to a significant drop in the stock market. Over time, though, the markets rebounded and eventually reached new all-time highs.

In 2024, the election results have again introduced uncertainty into the market. The initial reaction saw a sharp decline in stock prices, followed by a modest recovery.

Analysts expect short-term volatility due to possible delays in economic reforms, but they remain hopeful about long-term growth, supported by strong economic fundamentals. Understanding these patterns can help investors make more informed decisions during election periods.

The Bottom Line

The impact of elections on the markets and mutual funds in India is evident from past trends.

Elections bring uncertainty and volatility, which can lead to significant market movements. As an investor, understanding these historical patterns can help you navigate the market better during election periods and make informed decisions about your investments.

Disclaimer: The views expressed here are of the author and do not reflect those of Groww.