India general election update

The results

The official results for India’s general election indicate that the National Democratic Alliance (NDA) won 293 out of 543 seats, securing the win; the Bharatiya Janata Party (BJP) failed to get a simple majority, having won only 240 seats. This suggests that Narendra Modi will likely win a third term as Prime Minister, although his BJP will likely need to make some political concessions to their alliance partners. This could take the form of ministerial positions for some of the minority parties within NDA. The main opposition alliance, the Indian National Developmental Inclusive Alliance (INDIA), was able to secure 232 seats. As a frame of reference, NDA won 353 seats in 2019 versus 91 for the then-opposition alliance. While Modi has publicly declared his party’s victory, INDIA has yet to make any concessions 24 hours after vote counting began. Modi officially took the oath as Prime Minister on June 9th, marking his third consecutive term but his first without BJP winning an outright majority in general elections.

The reaction

After the initial selloff, Indian assets have since recovered. The Nifty 50 was up 2.9% late in the day while the Indian rupee clawed back some losses, up 0.24% versus the US dollar, at 83.32. Indian government bond (IGB) yields from the short end to about the 15-year segment were down 0.5 to 2 basis points (bps) while ultra-long-end yields sold off, up maybe 1 bp. Non-deliverable overnight indexed swap (NDOIS) rates have fallen 1.0 to 3.0 bps.¹ For the time being, things have stabilized as the political picture has become clearer. Generally, investors continue to have exposure in India. From a fundamental standpoint, India’s growth continues to exceed expectations² (Q1 7.8% vs. 7.0% expected), Consumer Price Index (CPI) inflation has trended down toward the target of 4.0% +/- 2.0% (April: 4.8%), fiscal deficits have consolidated (FY24 5.8% vs. 5.9% expected),³ and oil prices have softened. Market watchers will keep an eye out for the revised budget for FY25.

Policy going forward

We believe Modi will be pushing forward policies that have taken a backseat to the elections. Such policies include support for small- to medium-sized enterprises, enhancing the services exports sector, a focus on the manufacturing sector and others. The consensus is that Modi will have a harder time pushing these policies through. There has been much emphasis on India’s fiscal consolidation with Reserve Bank of India’s (RBI) latest dividend of US$25 billion. Will consolidation happen at an accelerated pace? Or will there be concessionary spending to appease political allies in efforts to push major reforms through? The revised budget in July will be the bellwether on India’s fiscal consolidation trajectory. Subsidies and tolerance for higher food prices are two main areas where there could potentially be compromise in the rural sector. Overall, we expect fiscal consolidation to at least meet the targets set out in February’s interim budget.

Technical tailwinds

Bond index inclusion will begin later this month, with IGBs to begin with an allocation of 1% in the JPM Government Bond Index—Emerging Markets (GBI-EM). The plan is to take IGBs higher by 1% every month until India’s allocation hits 10%. Estimates put passive flows at roughly US$25 billion. Based on aggregate foreign bond flows since the beginning of October 2023 to the end of May 2024, there has been a net inflow of US$10 billion. On a conservative basis, we could put another US$3.5 billion to US$4.0 billion in supranational, sub-sovereigns and agency (SSA) flows for a total of US$14 billion, which still leaves us north of US $10 billion in additional flows.⁴

Our positioning

We continue to favor both India currency and duration. India is aspiring to be the world’s third-largest economy within the next decade. The latest GDP prints have exceeded 7% on an annualized basis. If we were to take a lower figure, 6%, it is possible that India could surpass both Germany and Japan for that third spot by the end of Modi’s third term. Inflation is within RBI’s target range and drifting lower, with the latest print at 4.8%.⁵ India also continues to demonstrate a balance of payments surplus. We believe it will be supported by portfolio flows and some import relief if crude oil prices continue to moderate. Nevertheless, if there is risk to the currency, India has ample reserves of US$646 billion, as of May 2024. With the recent USDINR move upward, there was a rumored intervention of about US$6 billion to smoothen volatility, with policymakers likely to utilize more if the need arises. For reference, as global interest rates rose through 2022, RBI’s reserves were drawn down by about US$100 billion. We will look for Modi to expand capital expenditure but be vigilant on the fiscal deficit, with the FY25 fiscal deficit target at 5.1% and the FY26 target at 4.5%.⁶