India Election: Narrower Modi Win; $ Bond Impacts

Lakshmanan R, CFA, FRM - Head of South & Southeast Asia Corporates
Jonathan Tan Jun Jie - Analyst, South & Southeast Asia Corporates
Nicole Chua - Analyst, China Property

EXECUTIVE SUMMARY
  • The results of India’s general elections were declared on Tuesday, with the ruling Bharatiya Janata Party (BJP) helmed by incumbent Prime Minister Mr. Narendra Modi winning by a surprisingly narrower margin.
  • We expect the Modi administration to continue pushing ahead with its growth & development ambitions (particularly in infrastructure, manufacturing, and renewable energy), albeit at a slower pace given the BJP does not enjoy a majority in the Lok Sabha (the elected lower house of parliament), and must rely heavily on its coalition partners for policy reforms.
  • We anticipate a slower pace of and more hurdles to government decision making and policy enactment, as a larger opposition would likely result in greater pushback on and debate of the BJP’s proposed policies.
  • While we broadly expect gradual fiscal consolidation to persist, we believe the pace could slow further as the weaker election results could spur the Modi administration (in addition to ally pressure) to dole out more populist spending measures, in a bid to win voter support.
  • We believe a slower pace of fiscal consolidation could lessen the likelihood of an upgrade of India’s BBB- sovereign rating by S&P in the next 9-12 months, after it recently revised its outlook up to Positive from Stable.
  • Most of the Indian IG and HY $ bonds saw a limited impact post the election results announcement; India IG widened 1-4 bp while India HY widened 1-14 bp at the time of writing.
  • Unsurprisingly, bonds from the Adani Group (namely Adani Electricity Mumbai (AEML), Adani Energy Solutions (AESL), Adani Green Energy (AGEL), and Adani Ports & SEZ (APSEZ)) saw relatively more widening (7-18 bp); we expect the Adani Group $ bond complex to remain out of favour in the near term.
  • Yet, we retain our existing recommendations on AGEL (Underperform) and APSEZ (Market perform with a preference for the 2027 bonds), since we do not view our expected potential widening material enough to warrant a recommendation change.
  • We maintain our existing recommendations for the rest of the Indian corporate $ bonds under our coverage, as the Modi administration’s weaker-than-anticipated victory while modestly negative for the broader Indian space, does not lead to a material change in our prevailing fundamental and relative value views on the individual companies.
RELATIVE VALUE

With the Modi administration securing a weaker mandate than in previous election and broad expectations, policy reform is likely to proceed at a slower pace. While Indian equities plunged by the most in four years post the election results (SENSEX and NIFTY indices were both down 3% by Wednesday close versus Monday’s close), we note the impact on Indian corporate $ bonds was mostly limited. Since Monday’s close, most Indian IG corporate $ bonds widened just 1-4 bp, while most Indian HY corporate $ bonds widened 1-11 bp. We expect Indian $ bonds to grind wider by a further 5-8 bp for IG and 10-15 bp for HY over the next few days.

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