Analysts at Nomura predict that a victory for the Narendra Modi-led Bharatiya Janata Party (BJP) in the 2024 elections will attract foreign portfolio investors (FPIs) back to India. They estimate weekly inflows of $1-2 billion into the debt markets up to the JP Morgan index inclusion date on June 28.
Nathan Sribalasundaram of Nomura explains, “Given our base case is for a BJP win, we expect to see capital flows return and estimate around $1 billion - $2 billion of inflows weekly after the election into the index inclusion date.” This optimism is grounded in recent trends, where the RBI resumed accumulating forex reserves after a period of selling in April, driven by FPI activities in equities and bonds.
Should the BJP not win, Nomura forecasts potential outflows exceeding $30 billion within weeks, necessitating significant intervention from the Reserve Bank of India (RBI). However, this scenario is not their primary expectation.
Over the coming weeks, Nomura sees the RBI’s forex intervention strategy as a key factor in shaping interbank liquidity, heavily influenced by the election outcome. FPIs have started buying Indian Government Bonds (IGBs) again, though in modest amounts. “We should start to see inflows from GOI redemptions, interest payments, and lower T-bill issuance. Under our base case, we can see interbank liquidity entering into a surplus by July,” Sribalasundaram noted.
Moreover, foreign investors have shown renewed interest in Indian debt securities, with over Rs 7,400 crore invested on a net basis in May, reversing a net sell-off of over Rs 11,200 crore in April. This surge is largely due to the anticipated inclusion of Indian government bonds in the JP Morgan Government Bond Index-Emerging Markets in June 2024.
Additionally, Indian securities are expected to be part of the Bloomberg EM Local Currency Government Index by January 2025, with a potential inclusion of 34 securities and an initial weightage of 10%. Jahnavi Prabhakar, an economist with Bank of Baroda, highlighted, "With this, India’s rupee will become the third largest currency component-wise after China’s renminbi and South Korean won. Overall, we expect this will bring in combined (equity and debt) FII flow to the tune of $40-45 billion."
This positive outlook underscores the robust economic potential of India, driven by favorable political outcomes and strategic financial inclusions, promising substantial foreign investment inflows and economic growth.
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