This is a summary of the focus note. For the complete report and charts, please download the PDF


#1 The economy around elections

In our previous publication India’s economy and markets around elections, we delved into what one could expect from India’s economy and markets around the general elections, i.e., what tends to happen to growth, fiscal, inflation, investment flows, stocks, and the rupee in the quarters prior and subsequent to polls. We had taken stock of the five lower house elections since 1999. Growth, on average, slows a quarter before the elections but rises subsequently, by an average of ~60-100bps. Inflation tends to pick up post elections. Supply side dynamics will play a dominant role this time. The rupee tends to appreciate before elections, turning stable-to-weaker ex-post. US dollar and the authorities’ interventionist bent will be bigger influencers in this cycle.

#2 Is the voter turnout a harbinger of the upcoming results?

General elections are ongoing, with results out on 4-June. We had discussed the manifestos of the two big national parties earlier (India’s poll manifestos weigh continuity vs. populism). With little to chew on till the polls end in early-June (a ban is in place on exit polls till 1-June), markets have been focused on the lower voter turnout in the first few phases of the polls and linking this with the likelihood that the ruling party might fall short of its seat targets.

#3 What could be the immediate priorities of the incoming government?

Markets have fully priced in the prospect of a return of the incumbent government at the April-May 2024 elections, with the risk of disappointment hinging on the margin of lead compared to 303 seats for the ruling BJP party in 2019 and 353 seats for the coalition NDA. After assuming office, near-term priorities are likely to include tabling the full Budget in July, focus on reviving private investment interests, outline a multi-pronged approach to jumpstart employment generation, boost consumption and farm-supportive policies.

#4 What is our reading of high-frequency data?

The domestic economy continued to exhibit resilience into the new fiscal year, with automobile sales up 25.4% in Apr24, alongside a sequential pick up in vehicle registrations. In all, activity, and price indices (except food) are boding well for the economy’s recovery, with focus on the progress of monsoon. While the heatwave persists in some parts of the country, IMD (India Meteorological Department) forecasts above-normal rainfall this year, providing some relief to the lagging farm sector output.

#5 How did the economy fare in 1Q24?

Rural demand continued to catch up in the final quarter of 4QFY24 (1Q24), as signaled by the pickup in FMCG volume sales, two-wheeler sales and lower unemployment rate, whilst demand for MNREGA tapered off due to the start of the rabi harvesting period towards the end of the quarter. Business sentiments held up, captured by optimism on production and capacity utilisation, accompanied by a record high in e-way bills and double-digit jump in toll collections in March.

General government capital spending picked pace ahead of the elections, while the infrastructure industry index moderated towards the end of the period, including steel production. Corporate India registered a notable increase in revenue growth in 4Q, largely led by BFSIs and automakers, outside of which net profit slowed. On the external trade end, total exports (goods and service) rose by a faster pace than imports, helping to nearly halve the trade deficit and effectively lowering the drag on headline growth.

We peg our real GDP growth forecast at 7.0% yoy, taking the full year FY24 growth closer towards 8%. Our GDP Nowcast model that taps statistically important variables to provide a forward-looking assessment pegs growth in 1Q24 and 2Q24 (4QFY24 and 1QFY25) at about average of 7% (see chart).

Liquidity measures not a policy signal

The Reserve Bank of India’s decision to conduct three bond buybacks met with limited success. We do not subscribe to the view that the buyback was a signal of change in the central bank’s stance on liquidity or policy. In our view, it underscores the authorities’ preference to stay nimble with its liquidity toolkit, anchor short term rates, mainly tap the VRR/ VRRR operations as required and prevent an election-driven squeeze in the interim.

Record high RBI surplus transfer: Add to this, the RBI announced a record high surplus transfer of INR 2.1trn (~0.6-0.7% of GDP) to the government for FY24, compared to the budgeted INR 850bn, last year’s INR 874bn and exceeding market expectations of ~INR 1trn. While underlying details will be available upon release of the annual balance sheet, prima facie, higher interest income from foreign securities, FX gains from forex transactions (gross dollar purchases of $153bn), revaluation of gold reserves and lower provisions were likely the main drivers.

On policy, the central bank will be keen to watch the impact of the ongoing heatwave on perishables inflation, particularly vegetables. Encouragingly, the intensity has decreased in the eastern and southern belts, with temperatures high elsewhere, impacting the zaid crops (read our opinion piece What will the rising mercury this summer do to Indian inflation?). Yield on the new 10Y paper slipped below 7.10%, eyeing 7.0% next, with bond markets likely to take cues from US counterparts in a data-light week, ahead of the domestic inflation print due mid-month.


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