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Why markets are nervous after DMKs withdrawal from UPA II?

Why markets are nervous after DMKs withdrawal from UPA II?
Ever since Mamata Banerjee withdrew support to the UPA II government, the drive for reforms has been fierce. From partial diesel de-regulation to FDI in multi-brand retail, FDI in pension and insurance, the government's reforms initiative has been on an overdrive. All that is expected to be stalled now, given the DMK withdrawal of support, which has left the government teetering and on the verge of collapse.

If either the BSP or the SP withdraw support to the government, we would most likely see a mid-term election. The SP has problems with a host of reforms initiated by the government. It was part of a bandh that opposed foreign direct investment in multi-brand retail and it has made its opposition to FDI in other sectors clear.

It will be interesting to see if the government allows oil marketing companies to keep raising fuel prices, a measure that is not popular and would not go down with allies supporting the government.

Markets are nervous

On Wednesday JPMorgan wrote in a note, "The financial markets are nervous. The fears are focused on the potential impact of the DMK's withdrawal on the Government's relative strength and its ability to execute on the reform agenda. Success herein is crucial given the muddled macro."

On Wednesday foreign funds net sold in equities to the tune of Rs 236 crores. Throughout 2013, there are very few days when FIIs have net sold in stocks. It clearly shows that markets have begun getting nervous.

Domestic institutions also net sold shares on Wednesday in a clear sign that all is not well.

The real worry is about reforms. The political chaos has left the UPA weak, and has put a big question mark on pending bills, including those in insurance, pension and GST. And, markets are not going to like political uncertainty and policy paralysis too much.

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