A weaker mandate for NDA may trigger a shift in policies, but the macro backdrop may not change materially: Emkay Global

A weaker mandate in the 2024 Lok Sabha Election could prompt the BJP-led NDA government to reconsider its policies. However, major shifts in the broader macroeconomic landscape are unlikely, according to brokerage firm Emkay Global Financial Services.

"The power equation and possible political compulsions could lead to policy re-think by the NDA, but we do not think there will be a material change in the broad macro backdrop," Emkay said in a note.

The BJP won 240 seats, while the NDA bagged 293 seats overall in the Lok Sabha Elections 2024. The majority mark to form a government is 272.

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Emkay's report further stated that market reforms in areas such as land, labor, agriculture, and capital, as well as political reforms, could take a back seat.

The brokerage firm said there may be some skew in the spending mix, favouring revenue expenditures over capital expenditures.

Moreover, privatisation and asset monetisation could also be at risk, which could impinge on the Centre’s capex in the short term, Emkay said.

Also Read: Key bills on insurance, bankruptcy may face delays as BJP gets diminished

"We keep a close watch on state budget deficits, especially as elections are due in key states of Haryana, Maharashtra, Jharkhand, Delhi, and Bihar soon," said the brokerage firm.

As the brokerage firm does not expect major risk to macro-financial stability, it sees the twin deficit improving ahead, limiting external shocks to India via financial channels in case the global cycle turns averse.

"We do not see major fiscal derailment ahead and see FY25E CAD/GDP widening to only 1.2 per cent (FY24E: 0.8 per cent), with the solidly emerging GCC space adding new structural tailwinds. CAD funding has been smooth so far, and FY25 BoP may still be in surplus, assuming no global shocks, even as it halves from FY24," said Emkay.

"We watch the evolution of FPI/FDI flows closely. We maintain that GDP growth will moderate to 6.5 per cent in FY25E (FY24: 8.2 per cent) amid cyclical headwinds, whereas the fruits of past reforms continue to aid macro stability and trend growth," Emkay said.

Also Read: Emkay says market correction not deep enough, advises to stay away from PSUs, Capital Goods

Emkay believes the interplay of the Fed’s rate-cut repricing and China’s survival strategy could be key cyclical and structural forex plays in FY25/26.

"India runs a nearly 40 per cent bilateral trade deficit with China, and big CNY moves (policy-or/and market-led) would deeply influence the INR/Asian forex direction. Any massive move in the INR versus Asian EM peers will eventually see RBI’s tactical intervention," Emkay said.

Emkay expects the 10-year bond yields to range from 6.95 to 7.45 per cent in FY25E.

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