How Indian Elections Really Move the Stock Market

The Sensex gave back the exit-poll rally and more in one day, then recovered it all

Pre-poll close73,961

Mon, exit polls+2,507= 76,469

Tue, results−4,390= 72,079

Wed, allies commit+2,303= 74,382

Thu+692= 75,075

Fri, RBI and NDA vote+1,619= 76,693

Friday close76,693

The NDA still had a majority. Markets had been priced for something else: a BJP strong enough to govern alone. UBS analysts told Reuters that India's high valuations may have rested on "political stability, policy certainty that a strong government gave." With 240 seats, the BJP needed allies, and the two that mattered were regional parties: Chandrababu Naidu's Telugu Desam Party (TDP), with 16 seats, and Nitish Kumar's Janata Dal (United), with 12.

Take away its two biggest allies and the NDA drops below a majority

NDA seats won293

• 81.9%240BJP
• 9.6%28TDP and JD(U)
• 8.5%25Other NDA parties

Find the number

Modi kept his majority. Which number changed the market's view of the next five years?

Lok Sabha result, last general electionseats

Exit-poll average for the NDA367This set expectations. It explains the size of the fall, not why the outlook changed.Seats needed for a majority272The bar was the same as in the two elections Modi won outright.BJP seats on its own240For the first time since Modi came to power a decade earlier, the BJP fell short of governing alone, by 32 seats, so two regional parties would now shape policy.NDA seats in total293Still a majority, which is why the market recovered so quickly.

Tap the line you think is the tell.

Spotted it.Not that line. 240 was the number that mattered. The NDA cleared 272, but a BJP that needed partners meant a less predictable path for reforms, state-company sales and spending.

Explain every lineHide the other explanations

Which stocks fell the most?

The stocks most closely tied to the government did worst. State-run companies, known in India as PSUs (public sector undertakings), had rallied on the view that Modi would keep spending on infrastructure and defence. Reuters reported that the Nifty index of state-run firms fell 16.4% and energy stocks 12.5%, the worst day on record for both. Adani Ports fell 21.2% and Adani Enterprises 19.3%, the two biggest losers in the Nifty 50. The market sees the Adani group as closely tied to the government's infrastructure push (our piece on Adani after Hindenburg covers its debt). Consumer-goods stocks, which have little to do with politics, rose 1.3%.

Government-linked stocks fell three times as hard as the Nifty

Adani Ports−21.2%

Adani Enterprises−19.3%

ONGC−16.8%

Nifty state-run firms index−16.4%

SBI−14.4%

Nifty 50−5.9%

Nifty FMCG1.3%

Closing changes on result day. ONGC and SBI are state-controlled.

How fast did the market recover?

The next day the TDP and JD(U) publicly confirmed their support, and the Sensex rose 3.2%. By Friday the NDA had formally chosen Modi as its leader, and the Reserve Bank of India (RBI) raised its growth forecast for the year to 7.2%. The Sensex rose another 1,619 points to a record close of 76,693, and the Nifty closed at 23,290, just above the record it had set on exit-poll day.

Make a guess

After the result-day crash, how many trading sessions did it take the Nifty to close at a new record?

Tap your guess

Three or fewerYour guessOne to four weeksYour guessMore than a monthYour guess

0123456789 sessionsSessions to a record close

Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 3 sessions.

Three. The Nifty closed at 23,290.15 that Friday, above the 23,263.90 record set on exit-poll day. Anyone who sold at the result-day close missed the whole rebound.

Was the exit-poll trading a scam?

The two-day swing became a political fight. During the campaign, Home Minister Amit Shah had told a TV interviewer to buy shares before counting day: "They will shoot up." Two days after the results, opposition leader Rahul Gandhi called the swing the "biggest stock market scam" and demanded a joint parliamentary committee (JPC) to investigate the role of the prime minister, the home minister and BJP members. Piyush Goyal, then trade minister, called the claims baseless and said Gandhi was the one misleading investors.

Trinamool Congress MP Saket Gokhale complained to the Securities and Exchange Board of India (SEBI), the market regulator. At a press conference later that month, SEBI chair Madhabi Puri Buch said "there was not a single default in settlement," while acknowledging the volatility had alarmed small investors. Shortly afterwards Investing.com reported, citing an unnamed regulatory source, that SEBI had analysed data from all market institutions and found no evidence of manipulation or insider trading. That was a source, not a formal SEBI order. About three months after the results, the Supreme Court dismissed a petition asking for a probe of exit-poll broadcasters, calling it "political interest litigation." We found no record that a JPC was ever set up.

One detail cuts against the idea that small investors were the victims. Exchange data cited by Investing.com shows individual investors were net sellers of about ₹8,588 crore of shares on exit-poll day, into the rally, and net buyers of about ₹3,000 crore on result day, into the crash. As a group, they did the opposite of panicking.

How did the Sensex react to past election results?

The last result-day crash was the sharpest since the election about twenty years ago, when the BJP-led government lost unexpectedly and exit polls had missed a Congress comeback. A few days after that count, the Sensex fell as much as 15.5% during the day, and SEBI halted trading twice. Investors feared that the Communist parties propping up the new Congress-led coalition, called the United Progressive Alliance (UPA), would block sales of state companies. A later inquiry found foreign investors had used offshore derivatives called participatory notes in the selling, and SEBI barred UBS Securities Asia from issuing them for a year. Then the market took off. The Sensex was around 4,500 at the time of the crash and crossed 12,000 within two years.

At the election five years later, the surprise went the other way. The UPA came back stronger and no longer needed the Communists, and on the first trading day after the result the Sensex rose about 2,110 points, or 17%, to 14,284. It hit its upper circuit, the maximum daily rise allowed, within seconds of the open, and trading was stopped for the day. It was the first time the Indian market had ever been shut for rising too much.

Results that surprised moved prices; expected results barely did

1. 22 yrs agoShock NDA defeatSensex down as much as 15.5% intraday; trading halted twice
2. 17 yrs agoUPA wins without the LeftUp about 17%; trading halted for the day at the upper limit
3. 12 yrs agoFirst BJP majorityCrossed 25,000 intraday, closed up 0.9%
4. 7 yrs agoBJP wins 303Crossed 40,000 intraday, closed down 0.8%
5. 2 yrs agoBJP falls to 240Down 5.7%, record close three sessions later

The two Modi wins show the other pattern. The first time, the BJP won 282 seats, the first single-party majority in thirty years. Exit polls had signalled it, and the Sensex had already risen 2.4% on exit-poll day. On result day it touched 25,000 for the first time, then gave back most of the gain to close 0.9% higher. Five years later the Sensex rose 3.75% on exit-poll day, its biggest one-day points gain in a decade. On result day it crossed 40,000 for the first time and closed 0.8% lower. The good news was already in the price.

The pattern: result-day moves come from the gap between the count and what exit polls led people to expect, not from who wins. The direction depends on whether the surprise looks good or bad for policy.

Are coalition governments bad for Indian stocks?

The market fears coalitions, and both big result-week crashes show it. Returns don't back that fear up. Measured from one result-day close to the next, here is how the Sensex did. These are price returns only, excluding dividends.

The UPA coalition's second term beat the first Modi majority

2.55.07.510.012.515.0%0

11.1%

9.9%

13.1%

0.3%

UPA coalitionModi I majorityModi II majorityModi III coalition

Coalitions produced both a strong run and the weakest one here. The first UPA term, which began with that crash, rode a global emerging-markets boom; the flat run since the last election has a different cause, covered below. Five-year returns in India have tracked earnings, interest rates and global money much more closely than the shape of the government.

Check the claimThree claims about elections and Indian stocks

ClaimCoalition governments are bad for Indian stocks.Tap to checkMythThe UPA coalition's second term returned 11.1% a year on the Sensex, more than the first Modi majority's 9.9%.Flip backClaimElection-day crashes do lasting damage.Tap to checkMythAt the last election, the Nifty closed at a record three sessions after the result-day crash. After the crash twenty years ago, the Sensex nearly tripled in two years.Flip backClaimGovernment-linked stocks carry most of the election risk.Tap to checkFactOn the last result day, state-run firms fell 16.4% and Adani Ports 21.2%, against 5.9% for the Nifty.Flip back

How do election results reach company profits?

Elections matter through specific policy channels, and you can track each one in the budget.

Seats change policy, and policy changes profits in certain sectors

1. Seat margin (How freely the government can act) to Public capex (Roads, rail, defence)
2. Seat margin (How freely the government can act) to State companies (Sales, dividends, orders)
3. Seat margin (How freely the government can act) to Welfare and transfers (Money for allies' states)
4. Seat margin (How freely the government can act) to Fiscal deficit (Borrowing and bond yields)
5. Public capex (Roads, rail, defence) to Sector earnings and valuations
6. State companies (Sales, dividends, orders) to Sector earnings and valuations
7. Welfare and transfers (Money for allies' states) to Sector earnings and valuations
8. Fiscal deficit (Borrowing and bond yields) to Sector earnings and valuations

Capital spending. The government's spending on infrastructure supports the order books of builders, cement makers, railway suppliers and defence manufacturers. This was the main fear on result day: that a coalition would move money from building to handouts. It hasn't happened. The first coalition budget, presented a few weeks after the new government took office, set capital spending at ₹11.11 lakh crore, 17% above the previous year's actual spending. The budget for the current fiscal year raised it to ₹12.2 lakh crore.

The coalition kept raising the capex budget

2.55.07.510.0₹12.5 lakh cr0

₹7.4 lakh cr

₹9.5 lakh cr

₹11.1 lakh cr

₹11.2 lakh cr

₹12.2 lakh cr

4 yrs ago3 yrs ago2 yrs agoLast yrThis yr

Welfare and allies. Coalitions cost money. That first coalition budget gave Andhra Pradesh, the TDP's home state, ₹15,000 crore to build a new state capital. That is real money, but about 1.4% of that year's capital budget. State elections add pressure as parties promise cash transfers to voters. That can squeeze state budgets for roads and power.

The fiscal deficit. This is the gap between what the government spends and what it collects, and it decides how much it borrows. More borrowing tends to push up bond yields, which makes stocks less attractive (fiscal policy covers the basics). The deficit has kept falling under the coalition.

The deficit kept shrinking after Modi lost his majority

0123456%3 yrs ago2 yrs agoLast yrThis yrFirst coalition budget4.3%Fiscal deficit, % of GDP3 yrs ago5.6%2 yrs ago4.8%Last yr4.4%This yr4.3%

State companies. PSU stocks swing hardest on elections because the government is both their owner and often their biggest customer. A strong majority suggests more orders and steadier dividends. A weak one raises doubts about privatisation and pricing. A coalition does limit how much the government can change. In the spring it lost a vote on a constitutional amendment to enlarge the Lok Sabha, winning 298 to 230 but falling short of the two-thirds such changes need. Day-to-day economic policy has carried on.

What do state elections do to the market?

State elections run on a rolling schedule. Investors read them for national mood and state spending plans, but the price reaction is usually small.

When the NDA won 202 of Bihar's 243 seats almost a year ago, the Sensex fell early in the day and then closed up 84 points at 84,563. A late rally in state-owned banks helped. Exit polls had already called the result.

Earlier this year, five states and territories counted votes on the same day. The BJP won West Bengal for the first time, taking about 208 of 294 seats and ending the Trinamool Congress's three-term rule. It also held Assam comfortably. The Congress-led alliance won Kerala with 102 of 140 seats. In Tamil Nadu, actor Vijay's new party, TVK, won 108 of 234 seats and formed the government with Congress support. The Sensex rose almost 1,000 points in the morning and closed up 0.46% at 77,269. The next day it fell again as crude oil and the Middle East conflict took over. Brent crude was above $108 a barrel that morning.

Is the "Modi premium" gone?

For most of the past decade, Indian stocks traded at a large premium to other emerging markets. Part of the story was political: one strong party, steady reforms and big infrastructure budgets. The market's rebound to a record in three days said investors would accept a coalition.

What has hurt Indian stocks since is not politics. The Nifty peaked at 26,328.55 in the first days of this year. At the latest close it stood at 22,603, down 14% from that peak and about 2.8% below where it closed on exit-poll day two years ago. The causes are mostly outside India. They include the US-Iran war and crude above $100 a barrel, a US 10-year Treasury yield above 5% and a weaker rupee. The RBI has just raised its policy rate by 0.25 percentage points to 5.50%. Foreign investors have also moved money into Taiwan and Korea for AI chip exposure. Our pieces on why the Indian market is falling and the rupee and US tariffs cover these in detail.

The premium has shrunk with no change of government

₹2.6 lakh crNet foreign selling this year57% more than all of last year

11%India's weight in MSCI EMDown from about 20% at the last election

20%Valuation premium to EMNear a decade low

Foreign portfolio investors (FPIs), meaning overseas funds buying listed Indian shares, have sold a record ₹2,60,302 crore of Indian stocks so far this year, according to NSDL data. That is already 57% more than the ₹1,66,286 crore they sold in the whole of last year. Domestic institutions such as mutual funds, which collect monthly SIPs (systematic investment plans), have bought for 38 months running and absorbed much of that selling. State Street puts MSCI India at about 20.8 times forward earnings, below its five-year average of 22.2 times. PL Asset Management says India's premium to emerging markets has shrunk to about 20%. Whatever Modi premium existed was priced out over the past two years with the same government in place, driven by capital flows and macro conditions.

Your entry day in election week mattered less than what came after

Pick when you bought the Nifty and when you checked it

Bought at the close on

Exit-poll dayResult-day crashRecord, 3 sessions on

Checked on

Peak, early this yearLatest close

Nifty price return13.2%−2.8%20.3%3.3%13.0%−3.0%

+13.2%−2.8%+20.3%+3.3%+13.0%−3.0%above Break-evenbelow Break-evenabove Break-evenabove Break-evenabove Break-evenbelow Break-even

Break-even 0.0%

−3.0%20.3%

What should investors expect from the next general election?

The current Lok Sabha's five-year term runs out a little under three years from now, and the next general election is due shortly before that. Expect the familiar pattern: rising volatility through the campaign, exit polls on the evening of the last phase, a big move the next morning, and a second one on counting day if the polls are wrong.

The polls missed badly last time, and nobody can predict a miss in advance. What you can predict is which stocks will move the most: state-run companies, infrastructure and capital-goods names, the Adani group and companies that depend on a single ministry's orders. On the last result day those stocks moved about three times as much as the index. If you own them, count them as political risk as well as business risk.

Caveats

Four general elections make a small sample, and each fell in a different global cycle, so the returns table can't isolate politics from oil, interest rates or foreign flows. Intraday and stock-level figures for the last result day vary slightly between sources; we used Reuters closing data where available. The Sensex's closing level on the crash day twenty years ago isn't in any source we could verify, so we cite only the intraday fall.

Our read

Indian election risk is real but brief. The worst result-day shock in 20 years cost the Nifty 5.9% and was recovered within three sessions. Even after the crash two decades ago, when trading had to be halted twice, the market went on to nearly triple within two years. Selling because of an election has been a poor trade almost every time.

The market moves on surprises, not on who wins. When exit polls were right, as in both of Modi's majority wins, result day was flat; when results surprised, it was violent. Nobody knows in advance which kind of election it will be, so there is no edge in trading it.

Coalitions are not the problem the market fears. The UPA coalition's second term beat the first Modi majority on Sensex returns. The current coalition has kept raising capital spending and cutting the deficit. Indian stocks have done poorly since the last election because of oil, US interest rates, rupee weakness and foreign selling, not because of the seat count.

What we would do: hold through elections and don't borrow to bet on them. Keep politically sensitive stocks like PSUs, Adani group companies and capex plays to a position size you could watch fall 20% in a day. If you have cash and a plan, counting day is more likely to give you a good entry price than a reason to sell. Pay more attention to crude oil, the RBI and FPI flows, because those set the five-year returns.

Go deeper

• Risk and scenarios: turn a known-date event like counting day into bull, base and bear cases with probabilities, rather than one bet on the exit polls.
• Position sizing and portfolio: size PSU, Adani and capex stocks for a 16% to 21% one-day fall, which is what they did on the last election result day.
• Valuation and expectations: work out how much of a "Modi premium" a price assumes, and what happens when foreign buyers stop paying for it.

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