Market uncorks the Champagne

Mumbai :  Dalal Street has jumped the gun: the Bulls have uncorked champagne bottles and the bubbly is flowing. The ‘bazaar’ is almost euphoric at the prospect of a robust and stable government at the Centre. This was apparent from the frenzied buying on Friday, with the sensitive BSE benchmark — the Sensex — spurting by 650 points.

This is the first time that the Sensex has breached the crucial 23,000-level. The last record high was on April 23 when the index had touched 22,912.52 points. The markets, of course, have been soaring since Narendra Modi was named the prime ministerial candidate by the BJP.

The bubbly is flowing — Sensex spurts by 650 points — but what if the Modi bubble bursts?

The BJP has long been perceived as more investor-friendly than the Congress party, spurring hopes that Modi will rekindle a sluggish economy.

On Thursday, Modi, in a one-to-one interview with Times Now, had exuded optimism that BJP will get a clear majority and form the “strongest and the most stable government” since Rajiv Gandhi’s government in 1984.

He reiterated the claim on Friday at an election rally in Uttar Pradesh.  “We don’t have to wait until May 16 as the people have already decided. Good days are ahead,” he said.

The BJP is widely expected to win the most seats when the results are announced in a week, but opinion polls differ on whether it will gain a majority on its own in the 543-seat Parliament. Although the ruling Congress party is expected to be ousted after a decade in power,

Modi’s hopes of becoming the premier could still be thwarted if leaders of powerful regional parties refuse to do business with him.

So, despite the euphoria, brokers are nagged by fears that anything short of a decisive victory could also trigger the worst sell-off in years.

Most investors were caught off guard in the past two general elections — in 2004 and 2009 -– when opinion polls had gone awry.

Some preventive steps are being taken. Customers say at least four brokerages have raised margin requirements due to concern there could be intense volatility after election results are unveiled on May 16.

The stock market regulator has also asked exchanges to test their trading systems, especially new mechanisms put in place last year to deal with market volatility.

In a bid to prevent cases like a 2012 misplaced order that caused the NSE to plunge more than 15 percent, stock market regulator SEBI in September had revised rules for circuit breakers. These allow for a more measured and more flexible response to sudden market movements.

Ahead of the election results, Kotak Securities has increased margin requirements for retail investors by 10 percentage points to 30 percent of outstanding exposure to markets, while limiting funding for those trading with borrowed money.

Foreign investors are also buying heavily and now own a record 22 percent of the companies listed on the NSE, according to Morgan Stanley data, after buying a net $20.1 billion last year and about $4.3 billion so far in 2014.

“Unmistakably, the focus remains on the approaching D-day — that is, May 16, when the election verdict would be announced. But even before that, the market could react to exit polls numbers, once the final phase of polling is complete by May 12,” said Sanjeev Zarbade, Vice President, Private Client Group Research, Kotak Securities.

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