As general elections of the most populated country in the world, India, culminating in the largest party winning less than majority mandate yesterday, speculations are rife about both long and short-term repercussions on the financial markets. The previous two terms of the incumbent BJP-led government enjoyed a decisive majority in Lok Sabha, which, says UBS, helped them implement tougher reforms in economic policies.
Since none of the political parties has received a decisive majority, the UBS report speculates that a weaker government will be formed at the Centre, dependent on political allies who will favour populist policies that the market dislikes.
With respect to the Indian stock market, the report points out that ‘this was not an election outcome the market valuations were set up for.’ The statement was further elaborated to imply that the valuations of Indian stocks have been expensive for pretty ordinary corporate earnings growth or outlook, but one of the arguments behind India's rich valuations has been the political stability and policy certainty afforded by a strong government.
With a weak government at the Centre, these arguments would lose steam and the popular assumptions for the exorbitant and maybe undeserved valuation of many Indian companies would be demolished.
On its stance on the Indian stock market, the UBS report states, “We remain Under Weight India in an Emerging Market (EM) context. On Monday's close (June 03), India equities were at an all-time high premium to EM equities. We run a screen for stocks that have been better performers in recent years - trading on elevated valuations with ordinary fundamentals outlook - as a risk screen.”
With respect to the Currency Market and Indian Government Bonds (IGBs), the UBS states that there may be near-term setbacks to the current market positioning in the Rupee (INR) and IGBs due to the disappointing election results, the pullback in yields is expected to be short-lived. UBS also expects FX smoothening activity by relevant authorities to keep USDINR capped around the 83.50-83.60 range.
The report expresses its near-term optimism on bonds because it is expected that the medium-term focus on fiscal consolidation will not get disrupted. A larger-than-expected RBI dividend transfer would help assuage the fears of any surge in bond issuance in the second half of FY25 (2HFY). The report also speculates an extended run of non-residents’ participation in IGBs from forthcoming index inclusion. These flows, alongside lower bond issuance this year, should help keep bond markets’ demand-supply dynamics favourable. The report also expects a dip in CPI inflation to about 3% on a year-on-year (YoY) basis in July/August, which alongside already tapering credit growth ( approx. 10.5%, below the 2023 average of 17%) will be supportive for the duration.
Post-pandemic there has been a dichotomy in the consumption capacity of the rich and the poor within Indian society, which led the poor to cast a vote against the incumbent BJP, says UBS. The report speculates that the strict policy reforms which the previous BJP-led government implemented which were favourable to the market will now go soft due to the poor demanding equitable prosperity on the back of their voting prowess. It apprehends that while a BJP-led coalition, however weak, would still be able to continue many of its policy reforms, a non-BJP-led coalition is unlikely to pursue policies of Disinvestment of Public Sector Units, Land Bill, Uniform Civil Code, Fiscal Prudence, and push towards digitization. I.N.D.I.A. Alliance-led government may also tilt towards providing near-term support to the rural economy of India with an inclination to implement populist measures to boost the rural economy, it apprehends.
