With the BJP’s tally being well below the simple majority, Modi will be at the mercy of his allies in the 543-member house, which could introduce some uncertainty in policymaking. The market fears that a thin majority may force the government to undertake more populist measures, which may impact the fiscal consolidation trajectory.
The rupee slumped the most in over a year on Tuesday as the vote-counting progressed spurring a selloff in local equities. The 83.53 closing, down 0.47 percent on the day, is the worst single-day percentage fall since February last year.
Meanwhile, the dollar index rose 0.2 percent to 104.3.
It is clear that the Reserve Bank has stepped in to limit the decline as state-run banks were spotted offering dollars near 83.50 levels, likely on behalf of the central bank.
According to analysts at wealth management firm Nuvama, the rupee may fall to 83.60 this month if the political uncertainty prolongs, and may strengthen to 82.80 if the ruling front forms the government.
Their optimism stems from the likely inflow arising due to the bond inclusion in the JP Morgan index this month, indicating its rising global financial influence. This could attract up to $25 billion in inflows.
Additionally, a reduced short-term borrowings and a record RBI dividend payout have boosted the appeal for debt. Accordingly the yields have begun to ease from the quarterly high of 7.02 percent and are expected to continue towards 6.96% or lower, supported by supply and demand dynamics, liquidity management, moderating inflation, and a stable rupee, they said.
Vaibhav Vidwani of Bonanza Porfolio said though the NDA has achieved a majority, the BJP falling short can lead to further pessimism in upcoming sessions. Investors may stay cautious ahead of this week’s RBI monetary policy announcement.
