>INDIA ELECTION (NOMURA)

An election in the balance: Macro and market implications

Political outlook: An election in the balance
Markets are looking for a stable government that will push through incremental structural reforms after the election. But for now at least, the outcome of the election remains very much in the balance.

Economic outlook: Much rests on further reforms
The current slowdown notwithstanding, India’s economic fundamentals are in good shape. In our view, India’s potential structural economic take-off story, which was becoming evident before the global recession hit, still remains valid provided the new government continues with incremental reforms. Macro policies to revive the economy and instil investor confidence, fiscal prudence and pushing through reforms in what is likely to be another disparate coalition are the key challenges facing the incoming government.

Equity outlook: Curb your enthusiasm
Overall, we believe that the likelihood of a major post-election rally is small, save the possibility of a large single party in the driver’s seat. The only solace is that, given that uncertainty over its outcome is well-known, we do not expect to see any major post-election downside.

FX outlook: Post-election risk examined
Barring any pre- or post -election shock (at least immediately after the election) we expect INR to appreciate to 49.0 against USD by the end of 2Q09. Weighing on INR in the near-term is the abrupt deterioration in the risk backdrop, but we expect risk conditions to improve. We highlight support for a lower USD/INR from a weaker USD, favourable INR FX valuations, a raft of capital inflow liberalization policies and an improving current account position. But there are many post-election risks to INR that we address.

To see full report: INDIA ELECTIONS