India's Markets Suffer Worst One-Day Loss in Four Years as BJP Fails to Secure Majority

On June 4, India's financial markets experienced a significant downturn in response to the electoral outcome of Prime Minister Narendra Modi's ruling Bharatiya Janata Party (BJP). The Nifty 50 index plummeted by 5.93%, while the BSE Sensex suffered a 5.74% loss, marking the most substantial decline since 2020.

The All India Market Capitalization index, tracked on the Bombay Stock Exchange, recorded a staggering loss of over 31.06 trillion rupees, equivalent to approximately $371 billion, on that single day. Consequently, the Sensex index relinquished all its year-to-date gains, transforming a 5.85% increase to a 0.22% loss in just one day. Moreover, the Nifty 50 index's 7% year-to-date gain as of Monday dwindled to a mere 0.7% increment since the beginning of the year.

Election Results and Political Landscape

Despite the BJP's ability to secure 240 seats in the lower house of parliament, the party fell short of attaining a single-party majority, creating a tighter-than-expected electoral race. Nonetheless, the BJP-led National Democratic Alliance (NDA) coalition clinched 294 seats, surpassing the 272-seat threshold required to form the government.

Comparatively, in the 2019 general election, the BJP secured 303 seats, while the NDA won 353 seats. Prime Minister Modi had expressed confidence in March that the NDA would achieve over 400 seats. On the opposing front, the Indian National Developmental Inclusive Alliance coalition, led by the Indian National Congress, garnered 233 seats, surpassing initial predictions.

Financial Outlook and Political Implications

Analysts at Goldman Sachs issued a report asserting that, despite the reduced majority, the country's macro stability is not anticipated to be compromised. However, they highlighted the potential challenges that may arise in implementing significant structural policy changes, including land reforms for manufacturing growth and agricultural productivity enhancements.

Notably, this marks the first time in the last decade that the BJP will be governing without a solitary majority in the Lok Sabha, the lower house of parliament. Consequently, effectively managing coalition partners and negotiating key ministerial appointments will pose a substantial challenge for Modi's party, according to analysts.

The analysts concluded by stating their belief that the government will adhere to the announced fiscal consolidation plan, targeting 5.1% of the GDP for the current fiscal year. Nevertheless, they anticipate a reallocation of expenditures towards welfare initiatives amid the evolving political landscape.