Prime Minister Narendra Modi’s narrower election victory is unlikely to immediately lead to a change in government policy stance towards more populism, Kotak Alternate Asset Managers has said.
“In our view, it is too early to assume that the weaker mandate will lead to a change in policy stance, or that the government will resort to populist measures,” Jitendra Gohil, Chief Investment Strategist, Kotak Alternate Asset Managers, said in a note to investors post the general election results.
“We expect the new government will continue to focus on making India a more stable investment destination.
“In fact, central government capital expenditure seems to be peaking, and the robust revenue collection could naturally be directed to boost savings in the coming years,” he added.
Policies promoting financial inclusion, Make in India, export growth, defence modernisation, Ayushman Bharat, and reasonably high capex spending, as well as business friendly policies, are likely to continue, according to Kotak Alternate Asset Managers.
All eyes are now on the union budget to be presented in July to see if the new government would use the ₹2.1-lakh crore dividend bounty it recently received from the Reserve Bank of India (RBI) towards fiscal consolidation or for ramping up its social welfare scheme spends.
The 2024 general election results on Tuesday stunned political observers and large section of BJP supporters who were anticipating Modi led party to win a supermajority. According to the final tally, the Bhartiya Janata Party (BJP) ended up with 240 seats, falling short of magical 272 mark that would have ensured single-party majority for it in Lok Sabha.
BJP with the support of its pre-election allies is now set to stake a claim for forming the new government at the Centre.
Meanwhile, Gohil said that the perception that India needs a strong majority government to pursue economic reforms isn’t entirely accurate. The earlier coalition governments had also enacted difficult economic reforms in the past, he noted.
Impact on financial markets
As regards impact of election results on financial markets, Gohil said that he expects further correction in the equity markets, with a rotation towards defensive.
Pharma, FMCG and IT could see outperformance in the near-term.
“We also like private banks post this correction and believe they are well positioned. PSUs and defence sector can see further correction before stabilisation,” he said.
On fixed income markets, Kotak Alternate Asset Managers recommend adding duration to portfolios opportunistically.
“We believe India’s macro fundamentals will remain strong, and the focus will continue to be on financial stability. Hence, we expect yields to head lower, albeit slower than earlier anticipated,” he said.
Rupee likely to be volatile
On rupee, Gohil noted that INR could experience near-term volatility, but may depreciate at a slower rate than the historical average of around 4 percent.
“Weaker dollar fundamentals against India’s improved fundamentals may lead to a depreciation of around 2 percent per year in the medium term,” Gohil said.
Kotak Alternate Asset Managers continue to maintain its positive view on gold due to heightened geopolitical tensions and weakening dollar fundamentals.
