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Arjen van Dijkhuizen, senior economist at ABN AMRO, points out that with Indian votes still being counted, preliminary results suggest Modi will gain a second term as Prime Minister with an even stronger mandate.

Key Quotes

“According to these interim results, the BJP itself is set to gain an absolute majority of around 300 seats in the 543-member Lok Sabha (the BJP currently hold 269 seats and the whole NDA 341). That would mean that the election results are even better for Modi than recent opinion polls had suggested. It seems that Modi and his government coalition have profited from the flaring-up of tensions with arch enemy Pakistan over the past few months. Presumably, the electorate has approved Modi’s firm reaction to the terrorist attacks in Kashmir in February 2019 by a Pakistan-based militant group.”

“Based on the results known so far the election outcome is favourable for India, at least from an economic policy point of view. After having struck by policy paralysis for many years, Modi’s strong mandate gained in 2014 opened the doors for structural reforms, which are highly needed given India’s challenges in its physical and institutional infrastructure. Modi started with low hanging fruit such as improving the business climate. Still, he also succeeded in pushing through some more controversial reforms, such as a new bankruptcy code, a country-broad tax for goods and services and a large currency clean-up. These moves were visible in improving rankings on Doing Business and Global Competitiveness.”

“With election uncertainty out of the way now, we expect some improvement in momentum. We have kept our growth forecasts for the coming fiscal years unchanged at 7.5% so far.”

“All in all, the ‘real policy rate’ (nominal policy rate minus current inflation) has come down somewhat in recent months, but is still at relatively high levels (almost 3.5% in April). Hence, we see room for one or more rate cuts, also reflecting the more dovish stance of the Fed (we expect the Fed to stay on hold in 2019-20). That said, the RBI might prove to be cautious in its early June meeting. While the rupee has held up relatively well recently (partly related to the election process), EM currencies in general have felt the impact from the rise in risk sentiment on the back of the re-escalation of the US-China conflict.”