UP poll outcome: Fasten your seat belt for steep volatility ahead

NEW DELHI: While surging oil prices are grabbing headlines, UP results may bring in further volatility to the Street in the extreme short-term. The bias in the market may remain negative for now, said analysts, who noted that oil marketing companies may resort to hiking fuel prices post elections after an unofficial freeze, which may further stoke inflationary fears in the market.

The outcome of UP state elections will be announced on March 10.

"In shaky times, even small negative triggers may get a large reaction. Though Indians are known to vote differently in state and general elections, any big setback to BJP in the UP elections could be taken negatively by large investors, especially from the reform momentum perspective. In case BJP comes to power with a similar or slightly lesser numbers, the Street would be relieved and we could see some recovery," said Deepak Jasani of HDFC Securities.

Jasani said investors would watch out for any sharp drop in seats or vote share but added that the reaction will get over in 2-3 days and the market will shift focus to other key triggers.

"If BJP loses, certainly there is going to be an impact on the sentiment for one or two days. But in the medium to long term, I do not think it is a major event which markets are tracking," said Dipan Mehta, Director, Elixir Equities.

The bigger impact of the election outcome will be seen in the form of a hike in fuel prices.

Sandip Sabharwal of asksandipsabharwal.com said it is a perfect storm because the OMCs have not increased fuel prices since crude prices were at $75 a barrel. On Monday, Brent crude prices hit $139 a barrel briefly.

"What strategy do they (government) have; how does it impact the fiscal if they cut taxes; how does the free market and fuel prices actually work --- there are stability issues around there. The monetary policy committee has not recognised the inflationary risk. There are various macro and micro factors. It is best to stay out and wait," Sabharwal said.

The market, meanwhile, is also concerned over the Fed policy meet, which is scheduled for next week.

This is being reflected in India VIX, a measure of market’s expectation of volatility over the near term, which is ruling in the 29-30 range for the last one week. The index was ruling at 20.6 level in the middle of February and 16.45 level at the beginning of the year.

"The next 15-20 days are something in which one has to be a little careful trading into the markets, I think this is not a market for traders," said Neeraj Dewan, Director, Quantum Securities.

Kotak is factoring in a excise revenue hit of $20 billion for the government, assuming a Rs 10 per liter cut in excise duty on diesel and gasoline.

ICICIdirect said that the market bias remains negative as the index continues to form a lower high-low formation on daily charts, led by anxiety around geo-political events leading to a spike in crude oil prices, outcome of UP election and US Fed policy.

"Decisive close below key support threshold of 15,800 would lead to extended correction towards 15,400 as it is confluence of 61.8 per cent retracement of 2021 rally (13,596-18,604), at 15,510 over past two decade, the average correction post breach of 52 weeks EMA has been 5 per cent, which will mature around 15,400," ICICIdirect said.

Independent analyst Ajay Bodke said the market is expecting a combination of decrease in excise duty on petrol & diesel and some increase in retail prices after the election. "My feeling is that in addition to the above two, the government may summon ONGC, OIL and GAIL 'to do national duty' by ensuring that super normal profits above a certain threshold will not accrue to these companies but they are made to lighten the load on pump prices paid by consumers. This has happened in the past and is very logical too," Bodke said.