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How does the US election impact Indian markets in the short term?
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4 min read | Updated on November 15, 2024, 12:23 IST
SUMMARY
Did you know that FII flows in India tend to surge significantly in the month after the USA elections? The US election is a global event, creating uncertainty even in India. As such, markets tend to experience some volatility before the event. That said, data suggests that as the uncertainty ebbs, historically, markets have recovered. Read on to find out more.
Indian markets have historically recovered after the US elections
Did you know when Joe Bidden was elected as president in 2020, the global stock market cap surged by almost ~$1 trillion in a single day just after the outcome? That's the impact the world’s largest economy can have over the global economy.
That said, some short-term fluctuations impact the markets
Elections impact on Indian Market
Typically, the Nifty 50's performance is subdued before elections, with median returns of ~-1.6% in the month leading up to US elections, reflecting cautious sentiment. On a more optimistic note, once the uncertainty has passed, markets have typically bounced back in the month and the next three months following the elections.
Nifty50 returns prior to and after the US elections
| Election dates | % return before 1 month | % return after 1 month | % returns 3 months before | % returns 3 months after |
|---|---|---|---|---|
| 6 Nov 2024 | -2.4 | NA | -1.4 | NA |
| 3 Nov 2020 | 2.7 | 11.2 | 6.4 | 20.9 |
| 8 Nov 2016 | -1.9 | -3.5 | -0.4 | 3 |
| 6 Nov 2012 | 0.9 | 3.6 | 7.2 | 4.6 |
| 4 Nov 2008 | -12.8 | -11.3 | -30.4 | -11.9 |
| 2 Nov 2004 | 0.4 | 10.2 | 11.5 | 13.4 |
| 7 Nov 2000 | -1.6 | 4.5 | -7.3 | 10.9 |
| Average | -2.1 | 2.5 | -2.1 | 6.8 |
Source: Investing.com, NSE
Why does uncertainty with the US election impact India?
There are multiple reasons for the same. The USA is one of India’s largest trading partners and as such markets look forward to the commentary made by the candidates about their policy preferences.
That said, a more imminent reason for this impact is - FII flows.
FII’s hold ~16% stake in Indian markets, and their activity often intensifies around US elections as they adjust portfolios based on global economic expectations.
USA-based FPI investors amount to ~50% of FPI investments in India as per NSDL data. As such, USA elections have a considerable impact on FII flows.
As we show in the table below, FII flows typically tend to ebb (even turn negative) in the month before elections. However, post-election, there is a notable increase in FII inflows, averaging about 3x the pre-election figures, as markets tend to stabilize and policy directions become clearer.
Even in the current scenario of 2024, FII flows have been negative just before election month.
FII flows in Indian markets during US Elections (₹ crore)
| Election dates | Election month | Preceding one month | Following one month | Preceding three months | Following three months |
|---|---|---|---|---|---|
| 6 Nov 2024 | -14,358.0* | -94,017.2 | NA | -28,972.9 | NA |
| 3 Nov 2020 | 60,358.3 | 19,541.6 | 62,016.8 | 58,838.1 | 1,07,276.8 |
| 8 Nov 2016 | -18,244.2 | -4,306.3 | -8,177.3 | 13,836.3 | 548.2 |
| 6 Nov 2012 | 9,579.7 | 11,365.3 | 25,086.1 | 41,431.7 | 71,585.1 |
| 4 Nov 2008 | -2,598.3 | -15,346.7 | 1,748.2 | -24,836.3 | -4,934.6 |
| 2 Nov 2004 | 6,739.5 | 3,263.1 | 6,685.3 | 8,543.5 | 15,518.7 |
| Average | 11,167.0 | 2,903.4 | 17,471.8 | 19,562.7 | 20,679.4 |
Source: Moneycontrol, NSDL; data as of November 07, 2024
Conclusion
Indian markets experienced correction during the period before the elections owing to FII selling and geopolitical uncertainty. Post elections, FII inflows increase which results in a positive move for Indian markets.
Overall in the short term, US elections have had a mixed impact on the Indian market, while in the longer term Indian market has done well because of its fundamentals and economic prospects.
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