What are equity markets signalling on NDA's poll chances?

Anticipating victory for a Narendra Modi-led NDA alliance, markets have scaled 23,000 points on the benchmark 30-share Sensex index, on the venerable Bombay Stock Exchange. From September 13, the day the BJP nominated Modi as its prime ministerial candidate, shares have climbed 17% till Friday, showing, perhaps, that investors have greater faith in the NDA’s abilities in restoring growth and investments than the Congress-led UPA, which is serving out its last few weeks as a caretaker government.

Yet, the story is more nuanced than this. At least five major brokerages have hiked margin requirements for trading in the run up to May 16, expecting volatility should the NDA fall short of the required 272 seat majority in India’s Parliament.

The run up in the market also has a pattern: in seven sessions between May 2 and 9, the only net buyers have been foreign institutional investors ( FIIs) while domestic brokerages have been selling.

This is no random occurrence. In March and April, which saw campaign activity pick up and the beginning of polling, respectively, also saw a sell-off from domestic investors, even as foreign funds bought. This could mean that domestic investors, who are expected to be more savvy about the state of ground level politics, are less optimistic about an outright NDA victory than foreign investors.

Or, are there other reasons? There are macroeconomic factors to explain this trend. Overall, emerging markets are staging a huge rally around the world, the long delayed recovery of the West make foreign investors hungry for returns. Meanwhile, domestic investors have passed through a long slump, and as markets surge, they could be looking to skim some returns off from the top after five years of flat to slumping markets.