Although Narendra Modi won his third term as Prime Minister of India, his ruling Bhartiya Janta Party surprisingly could not secure a majority in the parliament, in contrast to what exit polls indicated. Private banks sound off on how this could impact the country’s markets and economy.

Contrary to exit polls, the ruling Bhartiya Janta Party (BJP) won only 240 lower house seats in the recent Indian elections. This is well below the 272 seats required to secure the majority and significantly lower than the 303 seats and 282 seats won in 2019 and 2014, respectively, 

Given the surprise outcome, how will India’s markets and economy fair?

Equities: Knee-Jerk Reaction

Markets responded with an 8 percent pullback in the Sensex index immediately after. According to Bank of Singapore chief investment officer (CIO) Jean Chia, the market is expected to remain rangebound thereafter in the near term due to the disappointing election results. The bank is neutral on the market and is also cautious about political risks domestically without a BJP majority. 

«Within India, we favor domestic sectors and industries that could benefit from the BJP’s 2024 Manifesto, which includes tourism, agriculture, housing, infrastructure, and manufacturing, although we remain wary that policy implementation could face some headwinds given the election outcome,» Chia said in a note.

«[The] strong negative market reaction was a reminder that despite the benign global equity volatility environment to which investors have become accustomed, emerging market equities carry a higher degree of risk,» commented VP Bank’s Asia CIO Thomas Rupf in a separate note, adding that there was limited upside in the short-term. 

Economy: Still Strong

Nonetheless, private banks remain optimistic about India’s economy. In the first quarter of 2024, it recorded 7.8 percent GDP growth year-on-year which «confirms an economic upcycle that we believe has several more years to go», according to a Julius Baer note by Asia head of research Mark Matthews. 

«From our perspective, the result shows that India is a democracy, which is something to be celebrated,» Matthews said. «While the BJP’s power may be diluted, it is still intact. Momentum in the economy from the existing reforms is still strong and will not fade away.»

«While near-term volatility is likely to persist until clarity on the new government and policies emerges, India's economy remains robust in terms of growth and inflation relatively well-behaved,» Rupf added.