As India’s extensive democratic process comes to a close, all eyes are on the eagerly awaited election results slated for June 4, 2024. While the political landscape holds significance, Goldman Sachs underscores the pivotal role of India’s domestic macro fundamentals in shaping asset returns. Amidst this backdrop, the Indian Rupee (INR) emerges as a resilient choice for investors, buoyed by robust USD reserves and a manageable current account deficit, presenting an attractive carry amidst a strong Dollar environment.
Furthermore, India’s fiscal deficit consolidation and inflation within targeted ranges bolster the appeal of Indian Government Bonds (IGBs). Despite relatively high valuations in Indian equities, robust earnings growth is expected to provide a buffer against election-related market volatility, potentially unlocking significant upside should foreign institutional investor (FII) flows rebound.
Interest in carry-earning strategies remains robust, with the INR standing out within the emerging market (EM) FX space due to its favorable carry-to-volatility ratio. This appeal is further accentuated when coupled with shorts on the Euro (EUR) or Chinese Yuan (CNH), supported by the RBI’s measured rate policy and effective management of FX volatility.
The trade-weighted INR closely mirrors the trade-weighted USD, offering a defensive component in EM FX carry strategies with global betas below historical averages. Despite modest undervaluation against the USD, significant FX spot moves post-election are unlikely due to the RBI’s adept FX management and the Dollar’s robust valuation.
Goldman Sachs reaffirms its recommendation to be long on 2-year IGBs, FX-unhedged, citing favorable growth prospects, manageable inflation, index inclusion, and recent rating outlook upgrades. India’s inclusion in the GBI-EM index serves as a focal point for global EM local fixed income investors, bolstering the country’s high yield and low volatility profile.
Historically, Indian equities have performed well around general elections, with median returns of 12% and 8% in the three months preceding and following elections since 1999. While recent market rallies align with this trend, there remains potential upside if foreign flows improve post-elections and volatility subsides.
Looking beyond the elections, Goldman Sachs anticipates robust mid-teen earnings growth to propel the index higher throughout the year. The firm maintains an overweight stance on Indian equities, favoring domestic sectors and large caps over small and midcaps, while recommending various targeted alpha themes within the market to investors.