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Lok Sabha elections: Amid euphoria over probable BJP win, market players brace for shocker

Saturday, 10 May 2014 - 7:15am IST | Place: Mumbai | Agency: dna

Brokerages raise margin requirements, Sebi asks exchanges to test trading systems

Indian markets are so confident the Bharatiya Janta Party (BJP) 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 BJP, seen as more business friendly than the 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 wrong.

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.

Should BJP do poorly in the vote and Modi not become prime minister, some analysts predict shares could plunge 8% to 10% in one day, and up to 20% in the aftermath.

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% or a little more."

Foreign investors have also bought in heavily, and now own a record 22% of companies listed on the NSE, 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 shares.

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 confidence.

A Sebi official said 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 identified.

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 said.

Ahead of the election results, Kotak Securities has increased margin requirements for retail investors by 10 percentage points to 30% 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 margin requirements.

For some investors, caution about leverage could prove necessary.

"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.

Rising volatility
India VIX surged 10% to 37.7 as traders braced for volatility before exit polls are announced on May 12 and votes are counted on May 16. The VIX may climb to 42 next week, said Geojit BNP's Mathews. Open interest in out-of-money call options on the Nifty is rising on expectation of a positive election outcome, Samir Gilani, head of trading at IDFC Securities Ltd, said. Open interest on 7,400 calls jumped 125% while that on 7,200 calls surged 73%.

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