Impact of Lok Sabha Elections on the Indian Stock Market

As voters remained glued to their screens on June 4, avidly following the announcement of the results for the Lok Sabha 2024 elections, another section of the Indian populace was also on edge. This segment included traders and investors who eagerly tracked how the market reacted to the election outcome. 

If you too were eagerly following the impact of the election on the stock market, you may already be aware of the volatility involved. However, as we step into the post-election period today, let us look back at the 2024 election’s impact on the stock market, right from the polling phase. 

Polling Phase Volatility and the Indian Stock Market

Polling for the Lok Sabha elections 2024 occurred in 7 phases from April 19 to June 1. The results were due to be announced on June 4. As we moved from one phase to the next and inched closer to the counting date, the impact of the election on the stock market became clearer. 

In May 2024, the market became increasingly volatile amid uncertainty around the election outcome. India VIX, which is widely known as the fear index and measures market volatility, more than doubled in three weeks from around 10.15 in late April to around 20.60 during mid-May. 

This is a common outcome of any election’s impact on the stock market. In the weeks leading up to the counting day, the prices of stocks and securities typically tend to get increasingly volatile. This can be traced back to the uncertainty surrounding the next government and which party or parties may form the cabinet. 

How the Market Reacted to Exit Polls?

Once the polling concluded and before the actual declaration of the results, exit polls attempt to predict the possible outcomes of the election based on inputs from voters and other variable data. This year, the release of the exit poll verdict had a particularly strong impact on the stock market. 

With most exit polls predicting that the incumbent government was poised to return for a third time with a clear majority, the general impact on the stock market was bullish on Monday, June 3 — which was the trading day preceding the results declaration date. 

In Monday’s trading session, the Nifty 50 easily crossed the 23,300 mark and hit a new lifetime high of 23,339. The Sensex, meanwhile, rose by over 2,700 points in the morning hours to hit a record high of over 76,700. Many other market indices also reported an increase in their values as most investors rushed into the markets to take long positions.

Election Results Impact on the Stock Market

While the exit polls predicted a clear and strong win for the incumbent government, the ground reality proved to be different as the race was tighter than expected. With the incumbent government and its allies on one side and the opposition block on the other, the election outlook turned out to be more ambiguous for the most part on June 4. 

As a result, with the government considering coalitions, the predominantly bullish sentiment from Monday quickly reversed and investor sentiment dipped rapidly on Tuesday. Both benchmark indices closed by around 6% lower on the counting day, making the impact of the election on the stock market clearer by the minute. Data from the markets also reveal that investors lost around Rs. 31 lakh crore due to the vast difference between the exit poll predictions and the actual election results. 

Post-Election Stability 

By the end of Tuesday’s trading session, as the picture of India’s next 5-year governance system became more apparent, the market attempted to stabilise slightly. Thereafter, during the trading session on June 5, the market appeared to have recovered from the massive and sudden dip during the previous trading day. As of Wednesday afternoon, both the major benchmark indices recovered by over 2%, with other key indices also reporting significant reversals and corrections.

A Handy Guide to Navigating the Impact of Elections on the Share Market 

The blueprint for understanding any election’s impact on the stock market can be divided into three segments — namely, the effect of the polling phase, exit polls and actual results. To navigate these scenarios effectively, you need to be in tune with the political pulse of the nation and have a fair idea of the big picture as well as the finer details. 

If you still need some help to leverage and make the most of the impact of the election on the stock market, here are some tips that can help. 

• Stay Informed: 

Keep a close eye on election-related news, polls and political events. This will help you develop an understanding of how different outcomes could impact the market.

• Risk Management: 

In volatile markets, it's crucial to manage risk effectively. So, you can consider using stop-loss orders to limit potential losses and diversify your portfolio to reduce risk.

• Technical Analysis: 

Use technical analysis to identify key support and resistance levels. This can help you make informed decisions about entry and exit points in rapidly changing markets.

• Monitor Market Sentiment and Stay Flexible:

Pay attention to market sentiment and investor behaviour. This can provide insights into potential market movements. Also, you need to be prepared to adjust your trading strategy based on changing market conditions. 

• Consider Hedging: 

If you're concerned about potential market volatility, consider using hedging strategies with instruments like options or futures to protect your portfolio.

• Post-Election Scenario: 

After the election results are announced, the market may experience a significant reaction. Have a plan in place for different scenarios and be prepared to act accordingly.

Conclusion

The phase immediately preceding and immediately following vote counting can be highly volatile. Investor sentiment and market outlook may change dynamically from one hour to the next, based on the new information being released. So, for conservative traders and investors, this may not be an ideal time to participate in the markets. 

However, if you are an aggressive trader who can afford to take risks and manage market volatility, you may find that this phase presents many opportunities. To leverage these market movements, you need to first understand the impact of elections on the stock market. This will then help you make informed decisions about which kind of position to take, depending on how the market reacts to election news.