Stock markets set to gain on Monday as polls indicate big win for Modi

Are stock markets set for a big gain on Monday? It looks like so. Markets are likely to cheer possibility of a landslide victory for Modi in 2024 general elections as indicated by Exit polls on June 1.

Majority of the exit polls indicated 300 plus seats for BJP-led National Democratic Front (NDA). If that proves to be true, Modi is set to return to form his third government at the centre which means policy continuity in the economy.

“Final outcome, if in line with exit polls, would likely calm investor nerves as political and policy continuity will be good for risk assets in the immediate run and macro stability in the medium term,” said Emkay analysts in a note.

“FX and rates markets will cheer the outcome, with RBI likely to juggle with the problem of plenty. Policy focus will continue to keep INR aligned with rest of EM Asia peers. Long bonds positioning should be buoyed. We continue to see bull steepening of the Gsec curve in coming months,” the note said.

Further, a healthy macro balancesheet of both public and private economic agents augurs well for a higher trend growth path. We expect reform-driven targeted expenditure agendas to continue from policy stand point.

Once the election event risk is over, all eyes would be on the budget in July, which could continue with the consolidation process while improving the budget internals. We see twin deficit to further improve ahead, which limits external shocks to India further via financial channels in case the global cycle turns averse, the note said.

The exit poll pegged BJP’s tally at 305-315 and that of the NDA at 350-377. While BJP may get a vote share of 40 per cent, Congress is likely to bag 62-72 seats with a vote share of 20 per cent, the Exit polls said.

To be sure, exit polls don’t always prove to be exact polls. But, this time, the direction of all pollsters seems to be telling us that Narendra Modi-led regime is coming back to power when the votes are counted on June 4, Tuesday. Since this column typically focuses on the banking sector affairs, let’s look at what will Modi 3.0 mean for banking and economy in particular.

For the broader economy, BJP getting a strong mandate will be music to ears. This will sooth investor concerns of a sudden change in the policy framework concerning various sectors. Implication—this will mean more foreign money will flow into the markets, pushing up equity markets by a substantial margin.

For the Rupee, bond markets too this should be good news. Bond yields may ease and Rupee may gain strength again US dollar. Both Rupee and bonds are likely to stay in a stable range for the rest of the year bolstered by policy stability.

Three, the long-awaited privatization of IDBI Bank may finally take off. The government and Life Insurance Corporation of India are selling an almost 61 percent stake in IDBI Bank. The whole process is on hold for now.

Four, the other is crucial reforms in bankruptcy laws turning it more efficient for resolutions. While IBC ushered in a better mechanism for bad loan resolutions, inefficiencies have been acting as a drag—mainly the delay in resolution. The resolution process has been slow due to factors such as litigation, dissenting creditors and poor infrastructure. Recoveries through IBC in FY24 were 32 percent, and financial creditors lost 68 percent of their claims. The time taken to reach resolution is 863 days instead of the stated 330 days.

Five, growth-oriented policies may get a push even as the government continue to focus on fiscal consolidation. The recent windfall from RBI—a surplus transfer of Rs 2.11 lakh crores—will help government either to lower fiscal deficit target (due to lower borrowing requirement) or spend on infrastructure projects. Either way, it will be good for the economy.

The next trigger for the economy will be the first budget of the Union government in July, which will set the tone for the government’s focus in the next five years. For now, let’s wait the June 4 final vote tally and see which way the final numbers go. Watch this space!