The unexpected election results in India have brought some political uncertainty, which may affect market sentiment in the short term. However, Citi Research says the event is not significant enough to warrant immediate changes to their macroeconomic forecasts for growth and inflation.
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting on June 7 paid closer attention to the fiscal implications of the upcoming budget. In light of this, the RBI has maintained status quo in its June 2021 policy, focusing on mitigating volatility in these uncertain times. Citi Research continues to forecast the first rate cut in October 2024, but acknowledges that future fiscal policy will need to be more integrated into its framework.
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Three key factors are expected to come into play in the betting market:
1. Risks of fiscal slippage. Markets will remain vigilant about potential fiscal slippage in both the short and medium term.
2. Sentiment of foreign investors. Political developments may prompt some foreign investors to reconsider the country risk premium associated with India.
3. Discussions on interest rate policy. There may be debate over whether the new government will support lower interest rate policies to boost economic growth, especially if inflation remains under control.
For now, favorable conditions for lower bond yields have paused until there is more clarity on these factors.
In the foreign exchange markets, equity market pressure could spread, potentially impacting the Indian Rupee (INR). However, the RBI has significant reserves to counter any idiosyncratic depreciation pressure. Citi Research notes that it is too early for the RBI to allow devaluation bias to boost government dividends. Instead, the central bank is expected to prioritize maintaining macroeconomic and financial stability, which should prevent any large and disorderly depreciation of the Indian rupee.
While the election results have introduced some uncertainty, Citi Research believes the broader macroeconomic outlook remains unchanged for now. The RBI is also taking a cautious approach, focusing on stability during these developments.
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