UP elections: Market's worst nightmare has come true now

After opening lower, the markets pulled back strongly as election results started pouring in. Though five states went in for elections, all-eyes were on Uttar Pradesh as far as the markets were concerned.

The indices have been volatile, reflecting the changing fortunes of the Congress Party in UP. Though the Congress was a distant fourth, the possibility of a tie-up with the leading Samajwadi Party (SP) was keeping some hopes alive. But even this now appears unlikely, given the Samajwadi Party’s strong closing flourish.

This is the worst case scenario that the market had feared. The results clearly show that parties are not benefiting from their association with the Congress party. Regional parties are once again in vogue with both the central parties - Congress and BJP - losing out to smaller parties. Managing the UPA has just got tougher.

But the key question is how foreign institutional investors will react to the election results, as the recent run-up in the market has been on the back of their funds. The rupee has already slipped below the 50 mark against the dollar, showing signs of money being withdrawn.

The SP has clearly said that they will not be supporting FDI in retail and have sided with the opposition in most of the key matters over the years, including the Lokayukta.

The picture that emerges is even more blurred from an FII point of view.

Unless the government counters these expectations with strong actions, both in the upcoming budget and otherwise, there is little reason for foreign money to come to India.