June 5, London/New York (Reuters) – The muted support that Prime Minister Narendra Modi received from Indian voters weakens the case for reforms that benefit business, and foreign money managers are now hesitant to pour more capital into the fastest-growing economy in the world.
After storming to power a decade ago, Modi’s Hindu nationalist Bharatiya Janata Party (BJP) won a third term in office, but this time without a majority of its own.
As the ballots were counted and net foreign selling reached a record $1.5 billion on Tuesday, India’s stock market endured the worst selling since the pandemic began. On Wednesday, stocks gained some ground again.
Investors argue that since the party is losing ground mostly in rural regions, labour and land reforms—which were supposed to generate wealth and growth—will likely be shelved while leaders concentrate on bolstering the party’s flagging rural support.
Global fund managers should exercise cautious due to the uncertainties, since they are largely underweight on India despite last year’s robust purchasing, according to HSBC data.
“Some regions of the country felt left behind, even though the government was really focused on business,” stated Alessia Berardi, head of emerging macro strategy at Amundi Investment Institute, the research division of the largest asset management company in Europe.
“So a more inclusive economy, a more efficient economy is important,” she stated.
Stocks that were heavily valued in anticipation of growth fueled by infrastructure and manufacturing investment slid from the market the most, while companies exposed to rural demand—like Nestle India (NEST.NS) and Hero MotoCorp (HROM.NS), which makes motorcycles—rose.
Bond prices declined as investors factored in the possibility of more welfare expenditure and a postponed budget reduction. The carefully controlled rupee plummeted to a seven-week low.
“India has been rewarded with a valuation premium for government stability over the past ten years…some of that valuation premium came out today,” M&G Investments portfolio manager for India and Asia Vikas Pershad said.
“I think priorities might shift a little in the short-term…so more benefits for the rural consumer, the rural working poor.”
