How election results will impact India's growth, stock markets

The election results will have a positive or negative impact on the economy depending on which party will win the elections.

Take a look at how each May 16 scenario is likely to turn the fortune of the economy…

Scenario 1
Single party gets majority/coalition with a few partners

Inflation
Sharp deceleration in CPI inflation in FY16 led by improvement in productivity dynamics

CAD
Wider CAD as capex picks up, FY15E: -2% to -2.5% of GDP, FY16E: -2.5%

Stock Market
Beta rally continues (assuming supportive global cues) for 2-3  of months, till market participants realise govt’s inability to drive rapid changes and FY15 first-quarter results temper optimism.

...

Scenario 2
Coalition with many partners 

GDP growth
Moderate recovery in growth. FY15E: 5.5-6%; FY16E: 6.25-6.75%

Inflation
Meaningful deceleration in CPI inflation in FY16, led by improvement in productivity dynamics

CAD
Wider CAD, moderate pick-up in capex. FY15E: -1.75% to - 2.25%of GDP, FY16E:-2.5%

Stock Market
A temporary lull in the market (flows-wise) till a post-poll alliance gets stitched; Given Modi at the helm, sentiment to remain positive; dash for quality within cyclical stocks

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Scenario 3
Fragmented coalition, with lead party getting around 180 seats 

GDP growth
Slow recovery in growth. FY15E: 5.0- 5.5%; FY16E:6.0-6.5%

Inflation
Gradual deceleration in CPI inflation in FY16, led by improvement in productivity dynamic

CAD
Low CAD as slow pick-up in capex. FY15E: -1.5% of GDP, FY16E: -1.4%

Stock Market

Markets to react negatively to “No Modi” at the Centre and a  potentially unstable government; some sector rotation towards defensive bets might be seen as cyclicals give up their gains

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Scenario 4
Government with lead party in supporting role 

GDP growth
Weak growth outlook. FY15E: 4.75-5%; FY16E:5.0-5.5%

Inflation
CPI inflation and inflation expectation likely to remain unanchored, leading to monetary tightening by RBI

CAD
Declining CAD as capex slips further. FY15E:-1.5% to -2.5%of GDP, FY16E: -1.5%

Stock Market
Unwinding of the beta rally as apprehension of a rating downgrade emerges; reallocation to defensives and exporters; Broad market to stay resilient as, historically, election results have never altered market trends