Political Uncertainty Could Weigh On Rupee Performance

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Polls and Market Miscalculate India Election Results in Bihar

The exit polls and the market consensus was wrong about India’s  Bharatiya Janata Party (BJP) electoral prospects in the recently concluded elections in the state of Bihar. The BJP's under-performance here fits into what we would characterize as a tail-risk, as they not only failed to garner a respectable 100+ legislative seats, but, at just 59, fell short of their previous tally of 86 seats (out of 243 contested.)

This election by itself is not critical for India's parliamentary arithmetic --where the BJP's lack of a majority in the upper house has frustrated its reform effort. This is because the Bihar election by itself will not immediately add to, or, as now seems inevitable, subtract from the number of seats the BJP has in the upper house of parliament.

But this was a symbolic election with Prime Minister Narendra Modi’s  personal prestige on the line (he frequently visited the state to campaign), and as several regional opposition parties and the Congress made a renewed stand to  try and halt the BJP winning streak in most, though, not all recent state elections. Moreover, Mr. Modi’s strategy of personally intervening in one state election after another to try and bring about BJP victories so as to ensure a gradual, medium-term, eclipse of the opposition’s strength in the upper-house --has detracted from greater consensus building and-- now looks to be on shaky ground.

Consequently, an emboldened opposition will likely mount a renewed challenge to the BJP's reform efforts. This will require a serious re-calibration of the BJP's political strategies to limit the risk of parliamentary logjams. Additionally, this may also require Mr. Modi to rein in allied parties, and factions, whose recent public pronouncements and posturing was recently perceived as too right-of-center from socio-cultural standpoint or perceived as insensitive towards minority rights.

Uncertainty About Content, Nature, and Timing of a Course Correction Could Weigh on Market Sentiment.

We don't know what course correction the BJP or Mr. Modi will take. But it is clear that a course correction in domestic social and economic priorities is now needed. These may include, but not remain limited to, a cabinet re-shuffle, more outreach to all opposition parties, greater devolution of legislative power to the states, and some delay in key reform legislation.

In the absence of a clear, or immediate, response, greater political uncertainty and a bit more bearishness about the economic and structural reform outlook will likely weigh on the rupee’s performance.
In relative terms, the magnitude of the political-economy headwinds confronting Indian policy makers is still lower than at most other major emerging markets. But clearly, the Bihar election signals a definitive end to the Modi honeymoon, and he faces a tougher road ahead.

The comments provided herein are a general market overview and do not constitute investment advice, are not predictive of any future market performance, are not provided as a sales or advertising communication, and do not represent an offer to sell or a solicitation of an offer to buy any security.  Similarly, this information is not intended to provide specific advice, recommendations or projected returns of any particular product of Standish Mellon Asset Management Company LLC (Standish).  These views are current as of the date of this communication and are subject to rapid change as economic and market conditions dictate. Though these views may be informed by information from publicly available sources that we believe to be accurate, we can make no representation as to the accuracy of such sources nor the completeness of such information.  Please contact Standish for current information about our views of the economy and the markets.  Portfolio composition is subject to change, and past performance is no indication of future performance.
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