Market Data 
As the world’s largest democratic exercise concludes, investors in Indian assets eagerly anticipate the election results on June 4, 2024. However, Goldman Sachs (NYSE:) believes that beyond the political outcomes, the strength of India’s domestic macro fundamentals will drive asset returns. With robust USD reserves and a manageable current account deficit, the Indian Rupee (INR) presents one of the most resilient carries in a strong Dollar environment.
Additionally, a consolidating fiscal deficit and inflation within target range enhance the appeal of Indian Government Bonds (IGBs). Despite Indian equities being relatively expensive, strong earnings growth should cushion the market from election-related volatility and offer significant upside if foreign institutional investor (FII) flows rebound.
Investor interest in carry-earning strategies remains high, and the INR stands out within the emerging market (EM) foreign exchange (FX) space due to its elevated carry-to-volatility ratio. This attractiveness is further amplified when paired with shorts on the Euro (EUR) or Chinese (CNH). Goldman Sachs expects this trend to continue, supported by the Reserve Bank of India’s (RBI) patient rate policy and tight management of FX volatility.
The trade-weighted INR closely tracks the trade-weighted USD, and with INR’s global betas below historical averages, the Rupee serves as a defensive component in any EM FX carry strategy. Despite modest undervaluation against the USD, primarily due to Dollar overvaluation rather than an India-specific premium, significant FX spot moves post-election are not anticipated due to RBI’s FX management and a richly valued Dollar.
Goldman Sachs reiterates its recommendation to be long on 2-year IGBs, FX-unhedged, citing strong growth, manageable inflation, index inclusion, and recent rating outlook upgrades. These factors create a favorable backdrop for India’s local fixed income leading up to the elections. Even with potential inflation increases in the second half of the year and delays in the Federal Reserve’s easing cycle, India’s relatively low volatility and high yield make local fixed income an attractive long-term investment within EM.
India’s inclusion in the GBI-EM index is a significant focus for global EM local fixed income investors. This inclusion not only supports India from a flow perspective but also impacts the overall benchmark profile due to India’s high yield and low volatility. While increased foreign participation in domestic debt markets can heighten sensitivity to external developments, the extent of such participation in India is expected to remain lower than other EMs, maintaining its status as a defensive market in the near term.
Historically, Indian equities perform well around general elections, with NIFTY showing median returns of 12% and 8% in the three months preceding and following elections since 1999. The recent rally aligns with this trend, suggesting limited scope for large moves if the election outcome matches opinion polls. Nevertheless, there is potential upside if foreign flows, which have been weak this year, improve post-elections and volatility decreases as seen in previous election cycles.
Beyond the elections, Goldman Sachs expects robust mid-teen earnings growth to drive the index higher throughout the year. The firm maintains an overweight position on Indian equities, favoring domestic sectors and large caps over small and midcaps, and recommends various targeted alpha themes within the market.
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