The Hindu Business Line : No-confidence motion and market behaviour

Stock markets might have pruned their losses on Tuesday as the Left parties actually carried out their long-standing threat of withdrawing support to the ruling government but investors ought to be careful in the coming days.

Uncertainty is not over yet; at least till something decisive comes out of the anticipated motion of no-confidence that may be put in the Parliament soon. The trading days preceding “votes of confidence” have usually been turbulent for stocks, in the past.

An analysis of the the BSE Sensex over such instances in the past decadeshows that markets have mostly fallen during the one-month period preceding a no-confidence motion. The Sensex has fallen between 3-11 per cent in these one-month periods. Instances could be May 1996, April 1997 and April 1999.

However, while they fall in the run-up to the motion, stock markets seem to cheer the outcomes.

The Sensex has risen by 3-23 per cent in the one-month period just after the results of the no-confidence motion arrived.

Return of clarity

Market participants believe that the return of clarity and certainty on the political scene once the no-confidence motion is through, helps markets.

With the current Government short of a clear majority, an early election could be on cards by late this year.

On two occasions in June 1996 and April 1997, stock markets rose in the one-month period preceding the ‘no-confidence’ motion. But the trend reversed in the next one-month period as stock markets perhaps got the whiff that the Governments may not survive for more than one year.

A stable political environment may be good from the point of view of continuity in policy decisions and stock market behaviour underscores the point.

In the current scenario, however, since the current Government has already spent more than four years at the helm, markets may have already started factoring in elections, diluting the importance of ‘no-confidence’ motion.

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