Government On An Even Keel Despite DMK's Cold Shoulder

The Indian markets have turned volatile after UPA's long-time ally, DMK, pulled out support from the government yesterday. The DMK has 18 seats in the Parliament and 5 ministers in the government. As per news reports, these 5 ministers are to also to tender their resignations soon.

The DMK has been seeking the government's support on the sensitive issue of violation of human rights of the Tamil community in Sri Lanka. The weak response of the UPA II government to this resolution against Sri Lanka riled the Chennai-based party, and eventually saw its members pulling out support from the government.

The UPA II government currently does not seem to be in immediate danger of running into a minority, but with this withdrawal, the clouds of political risk are hovering over the country again. The fate of the government now lies in the fact of the outside party support of 59 seats.

The government has come out with a statement that it is strong and stable, and it appears that there is no threat to it at the moment. The DMK chief, on the other hand, has said that he would reconsider his decision if the Parliament adopts a resolution before Friday, March 22.

While the drama unfolded in New Delhi, the markets in Mumbai cracked, with both the headline indices tanking more than 1% by closing on March 19. Market experts, however, believe that the UPA government has always managed to keep the support of the allies and that it will sail through the situation this time too. The last time when TMC pulled out support in the year 2012, the UPA had managed to make the majority number in the Parliament.

Economists believe that of the host of reforms announced since September 2012, most have no economic value. The only move with a tangible economic implication is the deregulation of diesel prices. FDI in retail, in fact, is yet to meet with a single proposal as yet. Nevertheless, a stable government will at least mean that the reforms will not be rolled back, which essentially means that there is no immediate risk of a downgrade of the sovereign credit rating of the country.

This development in Delhi overshadowed the monetary policy announced yesterday. The RBI cut the rates by 25 bps, but the hawkish stance of the apex bank is what the markets are expected to follow going ahead. The bank also raised concerns over the widening Current Account Deficit (CAD).

The government has envisaged a few steps to bridge the fiscal deficit in the next three years, but this will require political stability. The key events that the markets will track henceforth would be corporate earnings, global macro events, factory output and the GDP data. Having said that, any further adversity on the political front may lead to a further crack in the markets again.

The political factor is one of the biggest worries for the FIIs, who are widely believed to influence the Indian equity markets. Yesterday (March 19), FIIs emerged as net buyers, notching up Rs 62.63 crore on the BSE. DIIs too have bought shares worth Rs 71.38 crore, indicating that the institutions have used this as an opportunity to buy further in the markets.