Karnataka exit polls confuse Street, these factors will swing market mood

NEW DELHI: The die is cast in the key Karnataka election. The fates are sealed. And exit polls are out. But the findings have all but left investors scratching their heads.

Nine such exit polls predict 100 (average) out of 222 seats for the BJP. This means the party may not be able to form a government in the southern state without the support of JD(S).

Let's look at the variables at play.


BJP-JD(S) equation
The BJP had an unpleasant experience with the JD(S) last time around when the two formed a coalition, says Swaminathan Aiyar, Consulting Editor of ET Now.

"They were supposed to share power. Kumaraswamy ruled for 20 months, but did not hand over power at the end of those 20 months. There was a complete breakdown. So if they get together now, the shadow of that particular breakdown will be there. If at all they want to get together, I think the BJP will say: Look, we should be chief minister first and you second," Aiyar told ET Now.

H D Kumaraswamy, son of former prime minister HD Deve Gowda, was chief minister of Karnataka in 2006-07.

According to Kotak Securities, even if the Congress wins the election by a narrow margin, or through an alliance, it will not lead to a great deal of heartburn among market participants. That's because only six months are left for the next state election and 12 months for the general elections to kick off.

Eye on rural votes
Analysts say the Karnataka poll does not hold much significance as far as the political stability is concerned, given that and the BJP rules 21 out of 29 states and the state only accounts for 28 seats in Lok Sabha and 12 in Rajya Sabha.

The bigger question is if the BJP's experiment with rural voters like the announcement of farm loan waiver has paid off in a busy election season ahead.

"The market could view the Karnataka election results as a litmus test of the BJP’s popularity in the run-up to the next general elections. But we do not share this view because state elections are often dominated by local issues," said Sonal Varma of Nomura India.

"Farm distress has become a political issue and the rural-urban stratification of the Karnataka vote will be important. In the December Gujarat election, the BJP managed to retain its mandate, but suffered heavy losses in its rural constituencies. Not surprisingly, the BJP government has promised farm loan waivers in Karnataka in its manifesto," Varma said.

"The problem is that in whichever states the BJP came up with majority, it won 80-85 per cent seats -- whether it is Madhya Pradesh, Maharashtra, Rajasthan or even UP. It is very difficult to repeat the trend. In the best case scenario, this should be a 10 per cent drop. The point is that where is that 10 per cent being made from -- the North-East or southern states," said Abhay Aima, Country Head at HDFC Bank.

The country will see state elections in Mizoram, Chhattisgarh, Madhya Pradesh, Rajasthan and Sikkim in coming months before the knockout punch in May 2019.

There may though be a knee-jerk reaction to the Karnataka outcome.

Whichever way the result goes, it will get discounted in 24-48 hours and the focus will go back to earnings, Dipan Mehta, Member, BSE and NSE, told ET Now.