India's unexpected election results have created a degree of political uncertainty, which may impact market sentiment in the short term. However, Citi Research stresses that this development is not significant enough to warrant immediate changes in its macroeconomic forecasts for growth and inflation.
The Reserve Bank of India's (RBI) Monetary Policy Committee meeting on June 7 paid closer attention to the fiscal implications of the upcoming Budget. In view of this, the RBI maintained its policy status quo in June 2021 to focus on easing volatility during these uncertain times. Citi Research continues to expect the first rate cut in October 2024 but recognizes that future fiscal policy will need to be more proactively integrated into its framework.
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For market prices, three main factors are expected to play a role:
1. Risk of financial slippage: Markets will be vigilant about the possibility of financial slippage, in the short and medium term.
2. Foreign investor sentiment: Political developments may prompt some foreign investors to re-evaluate the country risk premium associated with India.
3. Interest rate policy discussions: There may be discussions about whether the new government will support a policy of lowering interest rates to boost growth, especially if inflation remains under control.
For now, the conditions for a downward trend in bond yields have been paused until there is more clarity on these factors.
In currency markets, stock market pressures could extend, which could impact the Indian Rupee (INR). However, the Reserve Bank of India has significant buffers to meet any special downward pressures. Citi Research points out that it is too early for the RBI to allow devaluation bias to boost government profits. Instead, the central bank is expected to prioritize maintaining macroeconomic and financial stability, which would prevent any significant and disorderly depreciation in the value of the Indian rupee.
While the election results have brought some uncertainty, Citi Research believes the broader macroeconomic outlook remains unchanged for now. The Reserve Bank of India also maintained a cautious approach, focusing on stability as it deals with these developments.
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