Election day outcome and circuit limits history on Indian exchanges: Here’s all you need to know

Needless to say, election outcome day is a much watched-out event and for the bourses it leads to heightened volatility resulting in circuit limits. So, here is a quick take on the historical connection between election outcome day and circuit limits.

First, let’s get started by understanding, circuit limits:

What is the circuit limit or price band?

On the stock exchanges, in order to control or safeguard excessive movement in the stock price in a very short time, circuit limits or price bands are decided. So, this indeed can determine the range within which the stock can trade on a particular day.

Similar to a stock, there is also an index-based circuit limit to protect investors’ interest at large.  So, as per the norms there circuit filters on the indices are triggered when the benchmark indices moves above or below the stipulated limits of 10 per cent, 15 per cent or 20 per cent. And in case such a situation is seen, a temporary halt in trading occurs nationwide.

“These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the Nifty 50, whichever is breached earlier,” said the NSE website.

So, such controls help in maintaining market stability by prohibiting any kind of panic selling or buying on the Street.

Working of the Nifty 50 index circuit breaker

(Source: NSE website)

History of circuit limits on election outcome day

In the previous two elections, the circuit limits weren’t hit on the back of significant gains in the run-up to the national elections then. But before it in 2009, two upper circuits were hit in a single trading session on the election outcome day wherein the poll verdict was in favour of the UPA government. And similarly, the lower circuit limit was hit on the 2004 election outcome day.

Suman Bannerjee-CIO, Hedonova also warned that on June 4 i.e the day of the General Election results, investors should be prepared for significant market volatility, potentially triggering circuit limits on the stock exchange.