Tuesday July 22, 11:52 AM
FACTBOX - Likely market reactions to confidence vote |
|
Reuters - The parliament will hold a confidence vote on Tuesday which will decide the fate of the Congress party-led coalition government.
Following are analysts' views on market expectations for the most likely outcome and how the markets would react to different results. -
---------------------------------------------------------------
MARKETS:
- Rupee 42.70 per dollar vs Friday close of 42.76/77; above 15-month low of 43.50 hit earlier in July.
- 30-share index closes up 1.6 percent at 13,850.04 points; set 15-month low of 12,514.04 earlier in month.
- Benchmark 10-year bond yield 9.05 percent vs Friday close of 9.09 percent; hit seven-year high of 9.55 percent earlier in month.
---------------------------------------------------------------
SCENARIO 1 - GOVERNMENT WINS VOTE
RESULT: Government wins confidence vote, stays in power, prospect of early election recedes.
This is the scenario markets are mostly expecting even if the ruling coalition wins the confidence vote by a narrow margin.
Market has mixed views on likelihood of renewal of reform push in the event of a win.
REACTION: Mild short-lived boost to stocks and rupee likely; government bond prices may ease on fiscal slippage concerns as government may try to implement a pay hike for federal employees, although economists say it also have to fight inflation which would be bond-price positive.
This outcome returns markets to pre-vote status quo, so inflation, slowing growth and oil price concerns move back to the fore, with central bank rate decision due July 29.
COMMENTS:
LATEST:
SHUCHITA MEHTA, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI
"If the government wins, the markets will take it positively. It will affect the rupee and equity markets positively mainly because, at least in the short term, the cause of uncertainty will vanish and markets might also turn hopeful of banking sector, pension sector, insurance sector reforms. So it will be taken positively.
"The bonds have already moved due to crude oil decline but if the government wins then it will continue its fight against inflation, which will be good news for the bond markets."
INDRANIL PAN, CHIEF ECONOMIST AT KOTAK MAHINDRA BANK, MUMBAI:
"Currently, the markets are pricing in a UPA (ruling coalition) win and if that is the outcome then I don't think there would be a significant upside for stocks and rupee from current levels. But bonds will be swayed more by non-political factors such as movement in global oil prices and a policy review ahead."
PREVIOUS:
A. PRASANNA, ECONOMIST AT ICICI SECURITIES, MUMBAI:
"The markets to some extent (are) pricing in a Congress party win and a win may provide a boost to the stock market on expectations the government may speed up reforms before it faces national elections next year."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
"The withdrawal of the left parties itself has been perceived as a positive thing by the market participants, and there are good chances that the government will pass this vote. Even if it is a minority government, it will be in a position to go ahead with the nuclear deal so that will give a positive boost to market sentiment.
"The support from left block was the major barrier in carrying out reforms so whatever the outcome the markets will react positively."
SCENARIO 2 - GOVERNMENT LOSES VOTE
RESULT: Government loses vote. Becomes caretaker government until early elections are called, likely by the end of this year. This will fuel political uncertainty at a time of high inflation, high interest rates, signs of fiscal strain, slowing growth.
REACTION: Likely short-term selling pressure on stocks, bonds and rupee. Later bond prices might gain a little on view new government could defer federal employee wage hikes until fiscal 2009/10 but inflation outlook will be key.
Political/reform uncertainty means market sentiment likely to remain subdued until elections are held.
COMMENTS:
LATEST:
SHUCHITA MEHTA, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI
"If the government falls then there will be a prolonged period of uncertainty between now and the general elections, so the markets may react negatively."
INDRANIL PAN, CHIEF ECONOMIST AT KOTAK MAHINDRA BANK, MUMBAI:
"It would have negative repercussions for both stocks and the rupee, and markets may fall sharply."
PREVIOUS:
A. PRASANNA, ICICI SECURITIES:
"It may be negative for the stock market and the rupee as it would spell uncertainty on the economic reforms front in the near term. But it may prove to be slightly positive for the bond market if the new caretaker government postpones the pay commission implementation."
(Additional reporting by Swati Bhat)
|
