Volatility may rise

Investors
are bracing for wild swings on the bourses in the near term after most exit polls predicted a badly fractured mandate in the just concluded parliamentary election. In the case of a fractured mandate, the government formation will take time causing volatility in share prices.

The counting of votes takes place on Saturday, 16 May 2009. A party/alliance needs 272 seats in the 543-member parliament to claim power at the Centre.

A coalition led either by the Congress or the BJP will be seen as a positive because they can both provide the impetus to boost sagging grow. Mutual funds which are sitting on a large cash pile are likely to step up buying if a coalition led either by the Congress or the BJP forms the next government at the Centre.

Nomura Holdings Inc. said last month that India's next government would offer better prospects for economic reforms without relying on Communist allies for support. Communist are opposed to economic reforms. Reforms virtually came to a halt in the past five years of the Congress-led alliance government at the centre, when the Communists provided support to the government from outside for a large part of the five-year term.

Coalition governments, which have been the order of the day for the last ten years, will be the case this time as well. What is important is a stable government. Consumption and investment decisions will be significantly impacted by any signs that the new government is unstable.

Once the government is formed, the focus of the market will shift to expectations from the Union Budget 2009-2010. Focus on infrastructure development will continue unabated irrespective of the political coalition that forms the next government at the Centre.

Rating agency Fitch on Thursday, 14 May 2009, said the government needs to cut fiscal deficit to avoid having its credit rating lowered. While current economic conditions are prompting many governments to undertake counter-cyclical stimulus measures, the recent deterioration in India's fiscal position accentuates underlying structural weaknesses in public finances that, if unaddressed, could undermine sovereign creditworthiness, Fitch said. Fitch, currently has a BBB- rating on India, its lowest investment grade rating.

Investors in India will also continue to take cues from global markets. A thaw in credit markets augurs well for global equities. The London interbank offered rate, or Libor, decreased almost two basis points to 0.83% today, 15 May 2009. Libor, used to set borrowing costs on about $360 trillion of financial products globally, has dropped as the US government and the Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero.

On the flip side, a string of weak GDP data out of various central and eastern European countries has stoked pessimism that the global economy is a long way from being out of the woods just yet.