General Elections 2024: How macroeconomic factors like equities, FPIs, inflation this year compare with 2019 polls

India, the world's largest democracy, is gearing up for General Elections this month, with over 96.8 crore eligible voters likely to participate and elect 543 members to the Lok Sabha. A recent report by BoB Economics delves into the macroeconomic factors during the previous election cycle in 2019 and compares them with the current year. The report highlights the months of April and May, the period when the elections are scheduled, as the focal point of analysis.

Evolving macroeconomic picture during the election months

India is set to undergo its 18th General Elections over a span of six weeks, from April 19 to June 1. The Lok Sabha elections will unfold in over seven phases, spanning 44 days, with the results slated for announcement on June 4. In 2019, the elections took place between April and May, with the results declared on May 23.

The analysis encompasses a range of macroeconomic variables, including inflation, bond yields, currency movements, equity markets, government capital expenditure (capex), and new investment projects. Inflation, measured by the CPI, remained steady during the April-May 2019 period, with a subsequent uptick observed post July, peaking in December. While there was no significant inflationary pressure attributed directly to election spending in 2019, potential delayed effects were acknowledged.

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For the current year, inflation is anticipated to sustain at current levels, with a possibility of some moderation during the election months. This projection aligns with RBI forecasts, indicating a likelihood of materialisation.

Credit growth

In the election months of 2019, credit growth maintained a stable trajectory, recording a growth rate of 13% for April and May. While there was a relative deceleration compared to March, this trend could also be attributed to the seasonal impact, typical at the beginning of the year.

10-year yield

In April 2019, the 10-year bond yield increased by 4 basis points, followed by a decline of 9 basis points in May of the same year. Interestingly, after the election period, bond yields experienced a notable decrease. This suggests that bond yields tended to remain firm during the election months before softening afterward. However, it's worth noting that liquidity conditions were tight during this time but subsequently eased.

In contrast, in 2024, the bond yields have been steadily softening over the past three months.

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Equity market

In April 2019, the Sensex saw modest gains, but these were erased in May of the same year. The pattern remained erratic in the following months, with no clear trend emerging in the stock market. Conversely, in 2024, the domestic market has witnessed stable gains so far.

Similarly, the Nifty index also experienced modest gains in April 2019, followed by losses in May. This lack of a distinct trend persisted during these months. In contrast, in 2024, the year began with some modest gains.

FPI flows

In 2019, Foreign Portfolio Investment (FPI) witnessed a net inflow of US$19 billion, with over US$4 billion flowing in during the election months. In the current year, February 2024 saw inflows of US$4 billion, followed by US$6.2 billion in March 2024.

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AUM of mutual funds

In April 2019 and May 2019, the net assets under management (AUM) for mutual funds exhibited a steady rise, reaching ₹24.8 lakh crore and ₹25.9 lakh crore, respectively. Although there was a subsequent decline, the outstanding amount remained within a range for the larger part of the year. The AUM surpassed the ₹26 lakh crore mark in October and fluctuated within the range of ₹26-27 lakh crore.

Notably, in 2024, the assets under management for mutual funds surged to ₹53.4 lakh crore in March. This increase could persist as the stock market has been performing well in April, reflecting optimism.

Rupee value

In April 2019 and May 2019, the currency experienced a depreciation of (-) 0.6 percent. Following the elections, there was a steady improvement as the currency appreciated in June 2019 and July 2019. However, due to other macroeconomic factors, the currency depreciated from August 2019 onwards until December 2019. It appears that the elections may not have directly influenced the currency's value, which was primarily driven by external fundamentals.

In recent months, the Indian Rupee (INR) has shown appreciation, with a 0.1 percent increase over the last three months.

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Government capex

During the election months of April and May, only a 14.1% share of the total capital expenditure (capex) target of ₹3.3 lakh crore in the Budget for FY20 was utilsed. This percentage was lower compared to the shares witnessed in the previous two years. It's possible to infer that the ongoing elections might have influenced government capex spending, as certain decisions could have been postponed due to the electoral process.

It will be intriguing to observe how this scenario unfolds in 2024.

FDI

In FY20, total Foreign Direct Investment (FDI) exceeded US$50 billion, with its share during the election months of April-May'19 amounting to 18.1 percent. This share was lower compared to FY19 and the post-COVID years, suggesting that foreign investors might be evaluating the progress and outcome of the elections before making investment decisions. This trend may also continue in 2024.

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It appears that during elections, the government adopts a cautious approach towards capital expenditure (capex), which is also reflected in company investment announcements and foreign investor behavior, says BoB Economics. However, indicators such as inflation, credit, currency, bond yields, and stock markets did not exhibit any specific tendency during the polling months in the last elections. It will be intriguing to observe if any exogenous shocks affect these variables this time around.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.