General Elections 2024: How different poll outcome scenarios may impact equity, forex and


With the elections almost over and the results less than 10 days away, global brokerage house Nomura believes that the uncertainty regarding the poll outcome will continue until 4th June, when it will be announced, although exit polls on 1st June should provide some clarity on the likely results. In the past, exit polls have been directionally correct, but have been more conservative on the magnitude, it noted.

The markets have recovered considerably in the previous week turning positive for the month of May after a very volatile first half. Benchmark Nifty is now up 1.5 percent in May so far, which was around 3 percent lower in mid-May. If the positive trend continues, this will be the fourth straight month of gains for the Indian markets.

In a recent report, Nomura presented its baseline and predicted how markets will react under various scenarios.

“All opinion polls conducted over the past one year have consistently suggested the BJP-led NDA is likely to return to power, winning over 272 seats. Polls conducted in Q1 2024 showed that the NDA had gained further momentum. For instance, most polls predicted 300 seats for the NDA in mid-2023, but polls in Q12024 predicted anywhere between 377 and 411 seats for the NDA. While most polls do not offer a breakdown of the NDA seats between BJP and its allies, a 330+ seat verdict for NDA implies, in our view, that the BJP is predicted by polls to comfortably secure a simple majority (>272 seats) on its own,” forecasted Nomura.

It further opined that if the BJP does indeed secure a simple majority on its own, then this should calm investor nerves. This scenario would largely ensure policy continuity, enable a sustained focus on capex while consolidating fiscal finances, support macro-financial stability, and focus on inclusive growth. Given its higher seat share in the lower house, and rising seats in the upper house, the government may focus on the more politically contentious reforms around the factors of production including land, labor, and capital. It added that, while the market’s reaction will be different in a BJP-majority versus an NDA majority scenario, the overall direction of economic policy would still be largely similar.

In its baseline, Nomura expects India’s GDP growth to moderate to 6.6 percent YoY in FY25 from a likely 7.8 percent in FY24, but it estimates an average growth of 7 percent per annum between 2024 and 2028, reflecting India’s higher growth potential.

Election Scenarios

Outright BJP victory: Nomura expects positive market reaction particularly if NDA gets close to 400 seats. Domestic sectors particularly financials, consumer discretionary, industrials/infrastructure and PSUs will outperform. IT services and healthcare are likely to underperform.

NDA victory: The brokerage expects a sell-off in highly valued domestic-oriented sectors, particularly industrials, infrastructure, and PSUs. It sees banking, consumption, and pharmaceuticals outperforming.

I.N.D.I.A victory: Nomura expects a sell-off across most domestic-oriented sectors particularly financials, industrial/infrastructure, consumer discretionary, and PSUs. Consumer staples, IT services, and pharmaceuticals are likely to outperform.

FX Strategy

Outright BJP victory: As per the brokerage, Rupee should rally if Nomura’s base case of an outright BJP victory materialises, as the market’s focus is shifting to less-favorable scenarios.

“We believe such an outcome would be positive for INR, as it should alleviate recent market concerns over a possible less-favourable election outcome. It would mean PM Modi continues to lead, and the positive macroeconomic and policy prospects would remain largely intact. Although we expect positivity for local markets through foreign portfolio inflows and selling of USD/INR following the exit polls, this could be limited by the market waiting for the actual election results on 4 June to confirm the extent of the NDA majority. We believe there is still some scope for spot USD/INR to move relatively quickly towards the 83-figure (the lower end of ranges over the past eight months) before this is likely to be met eventually with RBI FX accumulation. As noted, in the past four general elections, USD/INR was on average lower by 1.4 percent (NEER 0.8 percent stronger) in the 20 sessions after the elections,” explained Nomura.

NDA victory: If the polls show this, Nomura believes the markets would be disappointed (in the first instance after the exit polls are released), which could lead to some capital outflows and INR depreciation pressures. It expects the RBI to be active in capping the upside pressure on spot USD/INR, keeping it below this year’s high of around 83.58. Beyond the possible short-term negative impact on INR from a small NDA majority, it believes the market will eventually refocus on the medium-term outlook, as PM Modi will have retained the premiership and the positive economic/policy outlook would remain intact.

I.N.D.I.A victory: If the polls showed the NDA below the majority mark, Nomura expects the domestic markets to face significant selling pressure. Nomura believes that risks would be skewed towards an eventual adjustment higher in USD/INR, even if not immediate, given the significant balance of payments (BOP) outflow pressures. Overall, in such a scenario, it expects USD/INR would be approximately 3 percent higher over the subsequent one month.

“We believe RBI would utilize its FX reserves aggressively, but INR depreciation pressures would be severe, and we would likely see periodic adjustments higher in USD/INR. Fears around the outlook for India’s growth, fiscal conditions and investment policies could lead to increased FX demand and risk a slowing of net FDI. Net FDI inflows totaled USD14.8bn in 2023, and a slowdown would lead to a further struggle to finance the current account deficit (-$32.3 bn in 2023, -0.9 percent of GDP; Nomura forecasts -0.9 percent of GDP in 2024),” it predicted.

Bonds Strategy

Regarding how Indian Government Bonds (IGBs) might react to various election outcomes, Nomura sees the risk/reward as positive, with bonds potentially experiencing a larger move in baseline scenario (BJP securing a majority) than previously anticipated.

Initially, the brokerage expected a small move (2-3 basis points) on a BJP win, but recent outflows and the lackluster movement relative to global rates suggest the move could be around 5-7 basis points. A BJP win could push the 10-year yield below 7 percent as Foreign Portfolio Investment (FPI) flows return and Public Sector Undertaking (PSU) banks reduce selling.

In two less favorable scenarios, Nomura expects IGB yields to rise at least 20 basis points in subsequent sessions. PSU banks would likely absorb the foreign selling, especially around key levels of 7.23 percent (year-to-date high) and 7.38% (last year’s peak), with the 5-15-year part of the curve under the most pressure.

If BJP falls short of 272 seats but NDA still wins a majority, initial negativity will persist until official confirmation on June 4. Between the exit polls and the official results, market uncertainty would be high, but after initial selling, markets would likely stabilise, shifting focus back to index flows and macroeconomic factors, it added.

“Strategy-wise, we maintain our long IGB position with a conviction level of 4 out of 5. We maintain our view that the risk/reward remains favorable in the elections and the recent volatility has introduced some election premia into bond markets. Nonetheless, we expect investors to remain somewhat cautious before re-engaging more meaningfully after the elections,” it said.

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

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