As voting begins in the world’s largest election, analysts from Deutsche Bank Research have highlighted an interesting trend
The largest democratic exercise in the world is underway and an electorate of 900 million, 130 million of whom are first-time voters, will decide which political party or alliance will govern India for the next five years.
As complicated as the electoral process for India’s general elections may seem – close to a billion voters, 543 constituencies, 1.3 million polling stations, 11 million election officials, votes cast over seven phases over more than five weeks (elections start April 11 and end May 19) – it is an exercise that has time and again showcased the diversity and resilience of the country’s democratic fabric.
Analysts at Deutsche Bank Research have observed an interesting statistical trend during the general elections in India that almost always plays out in a similar manner.
Kaushik Das, Chief Economist, India says: “Going by historical evidence, the national currency generally tends to do well heading into an election quarter, but depreciates in the three-month period that immediately follows it. The pace of depreciation then starts reducing once again.”
The Indian rupee has gained seven percent after it hit a low against the US dollar in October last year. “If the election outcome is positive, the rupee will likely face more appreciation pressure by the end of May,” says Das. He expects the rupee to end the year at levels of 72 to the US dollar.
This view is also broadly consistent with the trend of foreign institutional investor (FII) flows into India. FII flows – particularly in equities – started to improve significantly from February and the momentum increased in March. “While FII flows in the coming weeks and months will be dependent on a combination of factors, including global event risks, oil prices, interest rate differentials, growth differentials, geo-political uncertainty etc., the past trend of FII flows around the election period provides scope for optimism, in our view,” says Das.
Reversing last year’s overall trend, foreign funds have this year made net investments of close to 7.5 billion US dollars in Indian equities in the months of February and March alone.
Past trends also suggest that the equity markets largely fare well around general elections, according to Deutsche Bank Research. In some cases, markets have reacted positively just before the elections, anticipating a favourable outcome; in other cases, markets have rallied once the election uncertainty is out of the way.