With the elections almost over and the results less than 10 days away, global brokerage house Nomura believes that the uncertainty regarding the poll outcome will continue until 4th June, when it will be announced, although exit polls on 1st June should provide some clarity on the likely results. In the past, exit polls have been directionally correct, but have been more conservative on the magnitude, it noted.
The markets have recovered considerably in the previous week turning positive for the month of May after a very volatile first half. Benchmark Nifty is now up 1.5 percent in May so far, which was around 3 percent lower in mid-May. If the positive trend continues, this will be the fourth straight month of gains for the Indian markets.
In a recent report, Nomura presented its baseline and predicted how markets will react under various scenarios.
“All opinion polls conducted over the past one year have consistently suggested the BJP-led NDA is likely to return to power, winning over 272 seats. Polls conducted in Q1 2024 showed that the NDA had gained further momentum. For instance, most polls predicted 300 seats for the NDA in mid-2023, but polls in Q12024 predicted anywhere between 377 and 411 seats for the NDA. While most polls do not offer a breakdown of the NDA seats between BJP and its allies, a 330+ seat verdict for NDA implies, in our view, that the BJP is predicted by polls to comfortably secure a simple majority (272 seats) on its own,” forecasted Nomura.
It further opined that if the BJP does indeed secure a simple majority on its own, then this should calm investor nerves. This scenario would largely ensure policy continuity, enable a sustained focus on capex while consolidating fiscal finances, support macro-financial stability, and focus on inclusive growth. Given its higher seat share in the lower house, and rising seats in the upper house, the government may focus on the more politically contentious reforms around the factors of production including land, labor, and capital. It added that, while the market’s reaction will be different in a BJP-majority versus an NDA majority scenario, the overall direction of economic policy would still be largely similar.
In its baseline, Nomura expects India’s GDP growth to moderate to 6.6 percent YoY in FY25 from a likely 7.8 percent in FY24, but it estimates an average growth of 7 percent per annum between 2024 and 2028, reflecting India’s higher growth potential.
Election Scenarios
Outright BJP victory: Nomura expects positive market reaction particularly if NDA gets close to 400 seats. Domestic sectors particularly financials, consumer discretionary, industrials/infrastructure and PSUs will outperform. IT services and healthcare are likely to underperform.
NDA victory: The brokerage expects a sell-off in highly valued domestic-oriented sectors, particularly industrials, infrastructure, and PSUs. It sees banking, consumption, and pharmaceuticals outperforming.
I.N.D.I.A victory: Nomura expects a sell-off across most domestic-oriented sectors particularly financials, industrial/infrastructure, consumer discretionary, and PSUs. Consumer staples, IT services, and pharmaceuticals are likely to outperform.
FX Strategy
Outright BJP victory: As per the brokerage, Rupee should rally if Nomura’s base case of an outright BJP victory materialises, as the market’s focus is shifting to less-favorable scenarios.
“We believe such an outcome would be positive for INR, as it should alleviate recent market concerns over a possible less-favourable election outcome. It would mean PM Modi continues to lead, and the positive macroeconomic and policy prospects would remain largely intact. Although we expect positivity for local markets through foreign portfolio inflows and selling of USD/INR following the exit polls, this could be limited by the market waiting for the actual election results on 4 June to confirm the extent of the…
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