How different 2024 general election outcomes may affect equity, FX, and bond markets

Global brokerage house Nomura believes that, with the elections almost over and the results less than 10 days away, the results will remain uncertain until 4 June, when they are announced; however, exit polls on 1 June should give some clarity on the likely results। Exit polls have previously been directionally correct, but have been more conservative in terms of quantity। noted।

Following a very unstable first half of the year, the markets have recovered significantly in the previous week and are looking forward to May। Benchmark Nifty has now risen 1.5 percent since the middle of May, after falling about 3%। This will be the fourth consecutive month of gains for Indian markets if the positive trend continues।

Nomura recently released its baseline and predicted different scenarios’ reactions.

“Over the course of the last year, every opinion poll has consistently predicted that the NDA, led by the BJP, will win over 272 seats and return to power. Surveys carried out in the first quarter of 2024 revealed that the NDA was gaining strength. For example, while most surveys projected the NDA to win 300 seats by the middle of 2023, surveys conducted in Q12024 indicated the party would win anywhere from 377 to 411 seats. While the majority of polls do not break down the number of NDA seats held by the BJP and its partners, a verdict of more than 330 seats for the NDA suggests, in our opinion, that the BJP is expected by pollsters to easily gain a simple majority (>272 seats) on its own “prediction Nomura.

It further stated that investors should feel more at ease if the BJP manages to win a simple majority on its own. In general, this scenario would provide policy continuity, allow for a continuous emphasis on capital expenditures while maintaining fiscal stability, bolster macro-financial stability, and prioritize inclusive growth. The administration might concentrate on the more politically sensitive changes pertaining to the factors of production—land, labor, and capital—given its increased seat share in the lower house and growing number of seats in the upper house. It further stated that, although the response of the market will differ in the event of a BJP majority as opposed to an NDA majority, the general trajectory of economic policy would remain substantially the same.

Nomura’s baseline forecast is for a mild 7.8 percent YoY GDP growth in FY24 and 6.6 percent YoY GDP growth in FY25, but it also projects an average increase of 7 percent yearly between 2024 and 2028, which reflects India’s stronger development potential.

Election Scenarios:

Outright BJP victory: Nomura anticipates a favorable response from the market, especially if NDA approaches 400 seats. Domestic industries will fare better, especially financials, consumer discretionary, industrials/infrastructure, and PSUs. Healthcare and IT services are probably going to do poorly.

NDA victory: The firm anticipates a sell-off in domestically focused, highly valued sectors, especially PSUs, infrastructure, and industrials. It views medicines, banking, and consumption as outperforming.

I.N.D.I.A victory: Nomura anticipates a sell-off in the majority of domestically focused industries, with a focus on financials, consumer discretionary, industrial/infrastructure, and PSUs. Prescription drugs, IT services, and consumer basics are probably going to do better.

FX Strategy:

Outright BJP victory: The brokerage says that if Nomura’s base case of an absolute BJP victory comes to pass, Rupee should rise because the market is already pricing in less-favourable outcomes.

“We think this kind of result would be good for INR since it should allay recent market worries over an unfavorable election result. That would indicate that PM Modi is still in charge and that there are still plenty of promising macroeconomic and policy opportunities. The market may be waiting for the real election results on June 4 to establish the extent of the NDA majority, even if we expect positive news for local markets through foreign portfolio inflows and selling of USD/INR following the exit polls. Before this is likely to be met eventually with RBI FX accumulation, we think there is still room for the spot USD/INR to go quite fast towards the 83-figure (the lower end of ranges over the past eight months). As mentioned, USD/INR was, on average, 1.4 percent lower (NEER 0.8 percent stronger) in the 20 sessions after the last four general elections, according to Nomura.

NDA victory: Nomura thinks that if the polls confirm this, the markets would be let down (especially when the exit polls are made public). This might result in some capital flight and pressure on the value of the rupee declining. In order to prevent the spot USD/INR from rising over this year’s high of roughly 83.58, it is anticipated that the RBI would actively limit upward pressure on the pair. It thinks the market will eventually return its attention to the medium-term perspective, since PM Modi will still be the prime minister and the good economic and policy outlook will still hold true, despite the potential short-term negative impact on INR from a small NDA majority.

I.N.D.I.A victory: Nomura anticipates strong selling pressure on the local markets should the polls indicate the NDA falling below the majority threshold. Nomura feels that given the strong balance of payments (BOP) outflow pressures, the odds would be skewed towards an eventual adjustment upwards in USD/INR, even if not immediate. In general, it predicts that USD/INR would increase by about 3% over the course of the next month in such a situation.

There would be strong pressures for the Indian rupee to depreciate, and the USD/INR exchange rate would probably see frequent adjustments higher, but we still think the RBI will use its foreign exchange reserves aggressively. Foreign exchange demand could rise and net foreign direct investment (FDI) could fall if investors are worried about India’s economic development, fiscal situation, and investment policies. The report predicted that a slowdown would make it even more difficult to fund the current account deficit, which was USD14.8bn in 2023 and -0.9% of GDP in 2024, according to Nomura’s predictions.

Bonds Strategy:

Nomura views the risk/reward for Indian Government Bonds (IGBs) as favorable, with bonds perhaps seeing a bigger move in the baseline scenario (BJP obtaining a majority) than expected, in relation to the possible reactions of IGBs to different election outcomes.

Brokerage had anticipated a modest change of 2-3 basis points in response to a BJP victory, but current outflows and lacklustre movement in comparison to global rates indicate a change of 5-7 basis points is more likely. As selling by Public Sector Undertaking (PSU) banks decreases and flows of Foreign Portfolio Investment (FPI) return, the 10-year yield could fall below 7% if the BJP is elected.

Nomura anticipates a minimum 20 basis point increase in IGB yields in the following sessions under two unfavorable scenarios. The 5–15-year portion of the curve would be the most affected, but PSU banks would probably soak up the foreign selling at important levels of 7.23% (year-to-date high) and 7.38% (last year’s top).

Initial pessimism will endure till formal certification on June 4 in the event that the BJP fails to secure 272 seats but the NDA secures a majority. Markets would likely stabilise after early selling as attention shifted back to index flows and macroeconomic fundamentals, it noted, after a period of high uncertainty due to the exit polls and official results.

We’re sticking with our long IGB position from a strategy perspective, and our conviction level is 4 out of 5. The recent volatility has infused some election premia into bond markets, and we continue to believe that the risk/reward is positive in the elections. “However, we anticipate that investors will exercise caution until after the elections before re-engaging more significantly,” it added.