In this week's newsletter, we delve into post-election dynamics in India. Initial market reactions to the election outcome were negative but swiftly reversed, underscoring India's promise as both a high-growth economy and attractive investment destination. In the short term, sentiment indicators signal ongoing growth in India’s pivotal sectors of services and manufacturing. Furthermore, India continues to be projected as the fastest-growing major economy this year by both the World Bank and the International Monetary Fund. Looking ahead, India is poised to leverage its demographic promise via its youthful workforce, a stark contrast to other major economies grappling with rapidly aging populations.
Turning to monetary policy, we note that while the central bank has kept policy rates unchanged in recent months, there is mounting pressure within its decision-making committee to consider rate cuts. On inflation, recent trends show a gradual disinflation driven by easing price pressures in non-core items, despite persistently high food price inflation. Shifting to currency markets, we note once more the Indian rupee’s resilience, which has been supported by central bank intervention and robust foreign reserves.
Market reactions to elections Indian equities plunged and bond yields surged on June 4th, following indications that Prime Minister Modi’s political party (BJP) would secure a smaller parliamentary majority than initially predicted. Among the initial market concerns was some apprehension that the BJP would need to depend on potentially fragile alliances with other parties to advance its reform agenda, a departure from its previous independent governance. However, initial apprehensions eased quickly as Indian equities rebounded and yields retraced, as evidenced in Chart 1. One of the key recent drivers behind rallies in Indian equity markets was the significantly higher involvement of retail investors, particularly in the options markets. This surge in participation has been partly spurred by regulatory measures aimed at enhancing market accessibility for individuals. Additionally, optimism about the longer-term outlook for the Indian economy has also contributed to the equity market rallies.