Indian Economy Reacts to Narendra Modi’s Re-election

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“The Indian economy is climbing to record-level stability after Narendra Modi led his Bharatiya Janata Party to a landslide victory.”

With a strong mandate, investor confidence in the newly re-elected Modi government is fast becoming apparent as foreign funds increased post-election. Macroeconomic and fiscal indicators show an appreciation, but many experts suggest that the high of the Modi win might not be sustainable.

Foreign Exchange Reserves

Banking on the appreciating Forex reserves, the Reserve Bank of India conducted two rounds of $5 billion (₹345 billion) rupee swap auctions last month.

India’s foreign exchange reserves are made up of Foreign Currency Assets, gold reserves, exclusive drawing rights and reserve positions from the International Monetary Fund.

While it peaked at $426.28 billion (₹29.5 trillion) in the first weeks of the second quarter, India’s overall foreign exchange reserves have declined to $417.998 billion (₹29 trillion) – a $2 billion (₹138.5 billion) drop in less than a week. Despite the boost following the elections tapering off, India remains relatively liquid with the success of the RBI auctions.

This reflects how the Forex market is becoming crucial to India’s global economic position, with Silicon India reporting that the country was the 8th best market last year.

Unlike the U.S., which is mainly represented by government bonds and institutional bonds, India’s Forex reserves are strongly linked to gold. This has allowed 8the country to strengthen its Forex institutions and rise up the global market ranks.

‘What is Forex?’ published on FXCM, outlines how it is the largest liquid market in the world and India’s continued growth in it shows how the economy is becoming stronger.

Something the Bharatiya Janata Party will hope to build on. However, some long-standing challenges on sustaining progressive fiscal policies may threaten this position.

Rupee remains strong

Following the euphoria of Modi’s record win and with the influx of foreign investments, the Indian rupee has strengthened over the last couple of weeks. This is in contrast to last year’s sustained weakening of the rupee, which was attributed to many companies’ reliance on U.S. dollar debt to fund their operations and capital outlay.

Analysts and economic experts all expect the rupee to remain neutral to bullish in the next couple of weeks but are divided as to what the year-end holds for the currency of the world’s largest democracy.

Orient Exchange CEO Rajiv Raipancholia anticipates the rupee will appreciate over the next couple of weeks, and then depreciate by the end of the year.

Stock markets at an all-time high

Overseas funds have already swooped in and snatched around $9.4 billion (₹649 billion) in local shares this year, and this continues to grow. Anticipating the Modi victory, BSE Sensex breached the 40,000 marks in less than two hours after the equity market opened on 23rd May. While short-lived, this record high has been interpreted by experts as a confidence vote by institutional investors who are standing by Modi.

Policy continuity

Many investors see the Modi win as an assurance to policy continuity and stability. Since his last term, Modi’s regime has introduced open market reforms, including the Goods and Services Tax and tightened the country’s bankruptcy laws.

Despite this boost, CNBC points out that “the economic slowdown can’t be abated if the re-elected government does not introduce reforms to alleviate the ongoing crisis on non-banking financial companies.”

The growing trade deficit, low corporate earnings, further fiscal reforms, interest rates adjustments, and oil prices are the most critical factors that might affect the monetary and fiscal indicators over the next few months.

The Indian economy reacted well to the Modi election. Economists will now wait to see how well it will perform during his new term.