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Indian Elections take markets by surprise

by Benedikt Kasior


When the 2024 Indian general elections concluded last Monday, markets were optimistic about the victory of incumbent Prime Minister Narendra Modi's Bharatiya Janata Party (BJP). Modi's tenure has been characterized by business-friendly policies and was associated with an average annual GDP growth of 5.8% since he took office in 2014.  However, as the final election outcome was much less favourable for Mr Modi than earlier exit polls suggested, the rupee, as well as Indian government bonds, tumbled. The NSE Nifty 50 Index, the main Index for Indian’s largest public companies, experienced its largest intraday drop since 2020.



As the BJP struggles to secure a majority in parliament, investors worry about the government's ability to implement policies to sustain economic growth. Controversial land and labour reforms, pushed by the Modi administration, are seen by many as essential to boosting growth but are now at risk of failing in parliament.


According to Avnish Jain, head of fixed income at Canara Robeco Asset Management Co, a weak government could lead to a broader fiscal push and some populism in the budget, indicating the possibility of less austere fiscal policies by a government that is dependent on its coalition partners.

The coming weeks will reveal whether Prime Minister Modi or other party leaders can form a stable coalition with regional parties and reassure financial markets.


Another major event this week was the 25bps reduction to 3.75% in the deposit rate by the ECB (European Central Bank) on Thursday. While the rate cut is welcomed by many analysts as support for the sluggish European economy, recent inflation data urges caution.


Although past inflation spikes have been attributed to the now-resolved energy crisis, Eurozone inflation appears to be almost as persistent as US price growth. Some investors worry that low unemployment and strong domestic demand in the Eurozone will result in sticky inflation, mirroring developments in the US.


If this scenario manifests itself, it will further complicate the ECB’s already challenging path back to the inflation target of 2%, rendering additional rate cuts in the near future less likely. Accordingly, ECB President Lagarde stressed the importance of gathering more data on the inflation outlook and the strength of monetary policy transmission, pointing out that the pace of future rate cuts remains highly uncertain.


Market report published 11 June 2024.






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