Domestic markets were on a roll on Monday on strong macro data cues and exit polls pointing to political stability. Benchmark equity markets hit fresh highs, rupee up 0.6% and 10Y yield slipped below 7%. Exit polls suggested that the incumbent National Democratic Alliance (NDA) will return to power with a clear majority for a third consecutive term, led by the ruling BJP party which is expected to secure an absolute majority on its own count (excerpt in the Weekly). On average, polls point to 350-370 seats for the NDA, leaving the opposition INDIA alliance with 140-150 seats. Exit polls have not only got the direction right in 2014 and 2019, but also modestly underestimated the actual result, suggesting that the margin of lead in the final count might be wider than what the polls suggest. The polling agency that correctly predicted the magnitude of victory in the last round, estimates NDA at ~400 seats. Official results are due on Tuesday.
If these polls match the actual count, it will point to a strong pro-incumbency wave and showcase support for the ongoing policies by the voters. The economic agenda is likely to be focused on the final budget in July in the near-term and further out on capex commitments, widening the manufacturing base, fiscal consolidation, and reforms targeted at the factors of production. Concurrently, strong macro data added to the optimism. The economy expanded a strong 7.8% yoy in 4QFY24 (1Q24CY) led by non-farm output and investment growth, which took the full-year FY24 growth to 8.2%. Strong growth and a sharp rise in revenues (tax and non-tax) helped the FY24 fiscal deficit to improve on the revised deficit by 20bp to -5.6% of GDP. The FY25 fiscal math got a hand from the 10% jump in May GST collections, after a record high nominal collection in Apr. Beyond the election results, markets will pay attention to the rate decision on Friday. We expect the MPC to extend the pause of rates in June, with an unchanged policy stance. An 8% GDP growth print, above-target inflation and uncertainty over the US Fed’s direction is expected to keep the RBI MPC comfortable in its stance at this juncture.
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