BJP's defeat in the Bihar State Elections is a "political pothole", which is likely to hurt the stock market in the near-term, yet global financial services majors are positive on the country's economic cycle. Global financial services majors Citigroup, Nomura and Bank of America Merrill Lynch believe the loss would likely hurt the market in the "near-term", but the fears of derailment of the reform agenda may be "exaggerated".
According to Citigroup, markets are likely to get affected as the Bihar loss is likely to give a break to BJP's momentum and dominance, it would also raise risks of opposition intransigence in legislative policy making and shift the focus on reform or policy response of the govt. "It is a political pothole – a bump that you usually ride out of with some temporary discomfort (though you do start looking at the road more closely). We stay positive on the economic cycle, and the market," Citigroup said in a research note.
It further added that "while contentious legislation: GST, land bill are for now more at risk, legislative policy making will be noisier". Echoing similar views, Japan's brokerage firm Nomura said, economically, the Bihar defeat will be seen as a sign of greater difficulty for the BJP in pushing through its reform agenda at the centre, due to lack of numbers in the upper house and risk of the BJP becoming populist. "Hence, the immediate reaction is likely to be negative. However, the fears of derailment of the reform agenda may be exaggerated," it said adding that "beyond the immediate negative reaction, we do not expect the direction or pace of economic reforms to change dramatically in the coming year".
According to Bank of America Merrill Lynch, lending rate cuts, not reforms hold the key to recovery. The global brokerage firm believes that reforms will continue to be "calibrated", especially after the Bihar poll result, and this may disappoint some segments of the markets. "It will not be easy for the Modi government to push for, say, GST Bill, in the winter session of Parliament. In our view, the market has been excessively focused on 'reforms'," it said in a research note yesterday.
BJP Bihar defeat unlikely to have economic implications, Says Fitch
Fitch Ratings yesterday said BJP's defeat in the Bihar assembly elections is unlikely to have any major implications on the economic front, but could complicate politics for the government. The rating agency said the defeat does not change its view on the medium-term economic outlook for India. "The loss may complicate politics for the central government, but we don't expect major implications on the economic front," Fitch Ratings Asia-Pacific Sovereigns Director Thomas Rookmaaker said in a statement.
It said the election results are not likely to impact decisions by foreign investors in other states and a big win for the BJP in Bihar would not have led to sufficient support in the Rajya Sabha anytime soon anyway. The ruling NDA does not have a majority in the Rajya Sabha where crucial reforms bills like the Goods and Services Tax (GST) and land acquisition are pending. Fitch has a 'BBB-' rating on India with a stable outlook.