Politics will be the decisive factor for Indian shares in the coming week as the sub-continent kicks off voting to elect a new government, with big foreign investors having bet heavily the exercise would produce an administration that will focus on mending the battered economy and meet the aspirations of the country’s young.
Money managers at foreign funds have piled into India in droves, scooping up shares worth almost $3.5 billion (Dh12.8 billion) since the end of February, convinced a likely change of guard in New Delhi would provide a shot in the arm to sagging business sentiment, revive investment and get industrial activity brimming again.
The inflows have powered share indices to a series of historic highs, and lifted the rupee nearly 15 per cent from its all-time low last August, indicating the strong bullish undercurrent. However, because of the big stakes in play, there is a tinge of nervousness below the surface.
“India’s currency and equity markets have hit a sweet spot, aided by a gush of dollars on the expectations of a stable investor-friendly government after Lok Sabha polls,” the influential Hindustan Times wrote in an editorial.
The top-30 Sensex rocketed above 22,500 above for the first time ever but pared gains to close at 22,239.50, up just 0.9 per cent over the week. The benchmark has rallied 11.7 per cent since the end of February, making it one of the biggest gainers in emerging markets. The broader 50-share Nifty also hit a record high of 6,776.75, before winding up at 6,694.35.
The rupee, which had slumped to an all-time low of 68.85 to the dollar last August, strengthened to as much as 59.5960 this week and closed at 60.08, with the central bank buying dollars in significant quantities since mid-March to slow the currency’s rise. India’s foreign exchange reserves jumped by $5.04 billion in the week to March 28 to $303.67 billion, data on Friday showed.
“There is a feel-good sentiment sweeping the financial markets and this is directly related to the perception among foreign investors that Narendra Modi is on a winning ticket,” said equity salesman Anmol Bhushan. “If he scores a decisive victory, the Sensex will soar above 24,000.”
Elections set to roll
Voting for the 543 seats in the Lok Sabha, or House of People, the lower house of parliament, begins on Monday with six constituencies in Assam and Tripura in the country’s northeast going to the polls. The more than a month long election will shift to the capital Delhi and some other states on Thursday. In all, 814 million people are eligible to vote in the world’s largest democracy.
Opinion polls, conducted as late as the last week of March, show the Bharatiya Janata Party (BJP) winning the single largest block of seats but, along with its National Democratic Alliance, may fall short of a simple majority. It would then have to cobble together the support of regional satraps to form the government.
As things stand today, this is the most plausible possibility. Because exit polls are barred in India until the end of voting on May 12, market players would be focusing on the percentage of voting in major regions to gauge the likely prospects of leading groups. For instance, an unusually heavy polling could indicate a decisive shift.
“Indians are disgruntled about the state of their nation, deeply worried about a range of problems facing their society and supportive of new leadership in New Delhi. However, despite a faltering economy, they remain fairly upbeat about their personal finances and hopeful about the economic prospects of both India and the next generation,” US-based Pew Research Centre said in a report dated March 31.
Based on a survey of 2,464 respondents in India conducted between December 7, 2013 and January 12, 2014, Pew said an overwhelming 70 per cent rooted for a change. This is bad news for the Congress party-led coalition that has been in power for 10 years, and its heir apparent Rahul Gandhi.
“Looking ahead, by more than three-to-one (63 per cent to 19 per cent) Indians prefer the BJP, not Congress, to lead the next government. Such sentiment is in no small part due to the belief by more than two-to-one that the BJP would do a better job dealing with India’s myriad problems,” Pew said.
Risks, rates on hold
There is little doubt that the challenges a new administration will face is formidable. Factory activity in March expanded at a slower pace dented by weaker domestic demand, with the HSBC Manufacturing Purchasing Managers’ Index dropping to 51.3 after rising to a one-year high of 52.5 in February.
The survey, which is closely tracked by economists and fund managers, showed input and output prices rose at their slowest pace in nine months, which should be a relief to inflation busters. Both wholesale and retail price inflation have been on a downward trajectory, and economic growth is expected to remain below 5 per cent for the second year in a row in 2013-14.
However, the central bank, which kept interest rates unchanged at its policy meeting on Tuesday, is in no mood to loosen policy in the near term.
“The Reserve Bank’s policy stance will be firmly focused on keeping the economy on a disinflationary glide path,” Governor Raghuram Rajan said. “If inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture.”
Radhika Rao, economist at DBS Bank Ltd, said the RBI was circumspect because the coming elections would add an event risk to the policy horizon along with the likelihood that poor weather conditions might feed into inflation yet again.
“We expect the rate trajectory to flatten here on, with no change likely at the next review in early-June. By then, the May election results will also be on hand, but a close to expectations outcome is unlikely to see the central bank throw caution to the air. The tight hold on policy levers is expected to remain in place,” she said.
Stable government
The possibility of a split election result and the fallouts of global warming are two big risk factors that have tied the hands of Rajan, a former chief economist at the International Monetary Fund who is best known for predicting the global financial crisis.
“If electoral outcomes fail to provide a stable government, the downside risks to growth could accentuate,” the RBI said.
“Weather and politics are the two known unknowns that can strike shocks that the economy needs to be prepared to absorb,” the Hindustan Times editorial said.
“A fractured mandate can trigger fears of a policy gridlock and can wipe away most of the recent gains in stock and currency markets,” the newspaper said and added that “the spectre of a failed monsoon because of a probable El Nino effect” was also a pertinent concern.
The writer is a journalist based in India
