MUMBAI May 9 Indian markets are so confident
the opposition party led by Narendra Modi will win the country's
elections that brokers fear anything short of a decisive victory
could spark the worst sell-off in years.
Shares hit a record high on Friday as opinion polls pointed
to a sweeping win for the Bharatiya Janata Party, seen as more
business friendly than the rival Congress party.
But caution about the vote results may prove warranted. Most
investors were caught off guard in the past two general
elections - in 2004 and 2009 - as opinion polls got it badly
Now some precautionary moves are being made. Customers say
at least four brokerages have raised margin requirements due to
concern there could be intense volatility after election results
are unveiled on May 16.
The stock market regulator has asked exchanges to test their
trading systems, according to an agency official, especially new
mechanisms put in place last year to deal with market
volatility. The Securities and Exchange Board of India (SEBI)
did not reply to a written request for comment.
A surprise could knock both shares and the rupee.
The gains stem from the assumption the BJP and its National
Democratic Alliance (NDA) will win a majority, or near it,
making Modi India's prime minister.
From Sept. 13 - the day the BJP nominated Modi as its prime
ministerial candidate - through Friday, the National Stock
Exchange, India's biggest bourse, surged 17 percent,
compared with only a 4 percent gain for the MSCI Asia-Pacific
index excluding Japan.
On Friday, the NSE index rose as much as 3.2 percent,
hitting a record high of 6,871.35.
Should BJP do poorly in the vote and Modi not become prime
minister, some analysts predict shares could plunge 8 to 10
percent in one day, and up to 20 percent in the aftermath.
That would roughly match what happened in 2004, when
investors were shocked that the BJP didn't win the election. The
NSE index fell 12.2 percent in one day, and 19 percent over two.
Ritu Jain, managing director of investment bank Eos Capital
Advisors in Mumbai, said the recent rally in Indian shares "has
been largely in anticipation of NDA coming to power with a
majority or near to majority."
"In the event of NDA not coming to power, markets can
correct by about 15 percent or a little more."
HEAVY FOREIGN BUYING
The BJP has long been seen by markets as being more
investor-friendly than the Congress party, spurring hopes Modi
will revive an economy growing at its slowest pace in a decade.
The hopes have sent sectors such as infrastructure and banks
Foreign investors have also bought in heavily, and now own a
record 22 percent of companies listed on the NSE, according to
Morgan Stanley data, after buying a net $20.1 billion last year
and about $4.3 billion so far in 2014.
However, that high a level is raising concerns of possible
destabilising foreign outflows that dent both the currency and
A scenario of stock market volatility and huge volumes would
mark the first major test for trading-system improvements made
by Indian exchanges after a slew of "fat finger" incidents hurt
In a bid to prevent cases like a 2012 misplaced order that
caused the NSE to plunge more than 15 percent, stock market
regulator SEBI in September revised rules for circuit breakers.
These allow for a more measured and more flexible response to
sudden market movements.
An official of SEBI told Reuters last week that it asked
exchanges to conduct stress tests to simulate a surge in trading
volumes and volatility, including circuit breakers.
"We need to ensure that the pay-in and pay-out obligations
are met in such an event, and that the exchanges can handle a
sudden surge in volumes," said the official, who declined to be
A spokeswoman for NSE declined to comment. A spokesman for
BSE, the oldest exchange, said "I am not aware about any special
communication from SEBI. I will check on that. But all systems
are checked before market hours."
HIGHER MARGIN REQUIREMENTS
An official at MCX-SX, India's smallest stock exchange, said
all three stock exchanges in India have been asked by SEBI to
check their trading systems, and had met regularly with
regulators over the previous two months.
"(Trading) systems have been checked and geared up
accordingly," the offical told Reuters, declining to be
identified because he was not authorised to speak to media about
The MCX-SX did not reply to a written request for comment.
Ahead of the election results, Kotak Securities has
increased margin requirements for retail investors by 10
percentage points to 30 percent of outstanding exposure to
markets, while limiting funding for those trading with borrowed
money, according to several customers who say they were informed
of the change.
Kotak Securities declined to comment, as did Kisan Ratilal
(KR) Choksey and Geojit BNP Paribas, two other brokerages with
customers who said stiffer margin requirements have been
imposed. A fourth brokerage, Sharekhan, confirmed having raised
For some investors, caution about leverage could prove
"The valuations suggest expectations are running high, so
even a slight disappointment after the final outcome could prove
disastrous," said Walter Rossini, who manages the 130 million
euros Gestielle Obiettivo India Fund in Milan.
(Additional reporting by Savio Shetty and Swati Bhat; Writing
by Rafael Nam; Editing by Richard Borsuk)