General Elections 2024: Potential Impact on Equity, Forex, and Bond Markets

As the 2024 general elections in India approach their conclusion, the financial markets are poised for various outcomes that could significantly impact equity, forex, and bond markets. Nomura, a global brokerage firm, predicts that market uncertainty will persist until the final election results are announced on June 4, with exit polls on June 1 providing some preliminary insights.

The Indian markets have seen substantial recovery in May, with the benchmark Nifty index rising by 1.5 percent after a volatile start to the month. If this positive trend continues, it will mark the fourth consecutive month of gains. Nomura has laid out several scenarios based on different election outcomes, each with distinct implications for the markets.

Election Scenarios and Market Reactions

Outright BJP Victory: Nomura anticipates a highly positive market reaction if the Bharatiya Janata Party (BJP) secures a decisive victory, particularly if the National Democratic Alliance (NDA) wins close to 400 seats. In this scenario:

  • Equity Markets: Sectors such as financials, consumer discretionary, industrials/infrastructure, and public sector undertakings (PSUs) are expected to outperform. Conversely, IT services and healthcare might underperform.
  • Forex Markets: The Indian Rupee (INR) is likely to rally, driven by foreign portfolio inflows and a reduction in USD/INR exchange rates. The RBI might step in to manage any rapid appreciation.
  • Bond Markets: Government bond yields could drop, with the 10-year yield potentially falling below 7 percent as foreign investment flows back into the market.

NDA Victory: If the NDA wins but without a substantial majority:

  • Equity Markets: A sell-off in highly valued domestic sectors such as industrials, infrastructure, and PSUs is expected. However, banking, consumption, and pharmaceuticals sectors might outperform.
  • Forex Markets: Initial market disappointment could lead to capital outflows and INR depreciation pressures. The RBI would likely intervene to cap the USD/INR exchange rate.
  • Bond Markets: Yields might rise by 5-7 basis points due to initial market negativity, stabilizing once clarity on the majority is confirmed.

I.N.D.I.A Victory: Should the opposition alliance I.N.D.I.A win:

  • Equity Markets: A broad sell-off across most domestic sectors, particularly financials, industrials/infrastructure, consumer discretionary, and PSUs. Consumer staples, IT services, and pharmaceuticals may perform better.
  • Forex Markets: Significant selling pressure on INR is anticipated, with a potential 3 percent increase in USD/INR over the following month. The RBI would likely use its forex reserves to manage depreciation pressures.
  • Bond Markets: Yields could rise significantly, potentially by 20 basis points, driven by foreign selling and increased uncertainty about economic and fiscal policies.

Forex Strategy and Expectations

Nomura’s forex strategy underscores a strong INR rally in the event of an outright BJP victory, as it would alleviate concerns about policy continuity. However, an NDA victory without a strong majority might lead to short-term depreciation pressures, with the RBI actively intervening to maintain stability. An I.N.D.I.A victory could result in significant balance of payments outflow pressures, leading to higher USD/INR rates.

Bond Market Strategy

Regarding Indian Government Bonds (IGBs), Nomura sees the potential for a notable reaction:

  • Outright BJP Victory: The 10-year yield could fall below 7 percent, supported by foreign investment and reduced selling by PSU banks.
  • Less Favorable Outcomes: Yields may rise by at least 20 basis points, with PSU banks absorbing foreign selling pressure. Market volatility and investor caution would likely persist until post-election stability is achieved.

Bottom Line

Nomura’s analysis highlights that the 2024 general elections will play a crucial role in shaping market dynamics across equities, forex, and bonds. An outright BJP victory is expected to boost market confidence and stability, while other outcomes may introduce volatility and require active intervention by the RBI. Investors are advised to remain cautious and strategically positioned as the election results unfold, keeping an eye on exit polls and the final announcement on June 4.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Media house. We advise investors to check with certified experts before taking any investment decisions.

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