Brooms Stopping BJP Sweep Show Risk to Rupee Rally: India Credit

Photographer: Manan Vatsyayana/AFP via Getty Images

Arvind Kejriwal, leader of Aam Aadmi Party, back center, takes part in a campaign rally in New Delhi on Nov. 12, 2013. Close

Arvind Kejriwal, leader of Aam Aadmi Party, back center, takes part in a campaign rally... Read More

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Photographer: Manan Vatsyayana/AFP via Getty Images

Arvind Kejriwal, leader of Aam Aadmi Party, back center, takes part in a campaign rally in New Delhi on Nov. 12, 2013.

The failure of India’s main opposition to win a majority in state elections in the capital highlights the risk the world’s largest democracy will fail to elect a stable national government next year.

The Bharatiya Janata Party won fewer than half the seats in Delhi where the debutant anti-graft Aam Aadmi Party, whose symbol is a broom, came a close second. While stocks and the rupee rallied after the BJP swept to power in three other states, Mizuho Bank Ltd. said the biggest threat to markets remains that next year’s election will bring a weak and indecisive coalition to power.

“A more fragmented government could introduce policy-making impediments,” Vishnu Varathan, senior economist at Mizuho Bank in Singapore, said in a Dec. 9 telephone interview. “A stable government is what’s most important.”

Since the mid-1990s, the ruling coalition’s largest party hasn’t won enough seats to allow effective policy making, Societe Generale SA said. Reliance on regional groups frustrated Prime Minister Manmohan Singh’s attempts to enact laws such as those allowing more foreign investment even as economic growth slumped. The BJP governed from 1998 to 2004 with the help of partners who have since broken ties with the Hindu nationalist party partly due to its policies toward minorities.

Rupee Surges

The rupee fell 0.1 percent to 61.20 per dollar as of 11:40 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. The currency surged as much as 0.9 percent to a four-month high of 60.8475 yesterday. The S&P BSE Sensex Index (SENSEX) of shares fell 0.3 percent after climbing 1.6 percent to a record yesterday. The yield on the benchmark 10-year government bond fell three basis points, or 0.03 percentage point, to 8.87 percent.

“The Indian election story is a classic ‘buy the rumor sell the fact’ type of outcome,” Jonathan Cavenagh, a strategist at Westpac in Singapore, said in a telephone interview yesterday. He recommends buying the rupee with a target of around 59 per dollar and booking profits on the trade as national polls approach next year.

India’s credit rating may be cut to junk next year unless the 2014 election leads to a government capable of reviving expansion in Asia’s third-largest economy, Standard & Poor’s said last month.

Singh’s attempt to pass bills such as allowing foreign companies to sell insurance have been thwarted by coalition partners.

Coalition Politics

His biggest ally Trinamool Congress quit in September 2012, opposing decisions to raise diesel prices and allow foreign supermarkets. In March, the regional Dravida Munnetra Kazhagam pulled out over India’s policy toward Sri Lanka. The DMK is based in the southern state of Tamil Nadu, which shares cultural and religious ties with ethnic Tamils in Sri Lanka.

Regional parties in India champion local concerns over national issues, Societe Generale analysts including Paris-based Patrick Legland, wrote in a research report in October.

Indian voters are spread across 28 states and seven federal territories, speaking more than 22 languages with over 2,000 dialects. While the majority of India’s 1.2 billion citizens are Hindus, the nation has a secular constitution and is home to the world’s third-largest Muslim population.

Narendra Modi, the BJP’s prime ministerial candidate, is credited with achieving higher growth than the national average in his home state of Gujarat and arouses strong emotions across the nation. He was refused a U.S. visa following allegations that he failed to control attacks by Hindu mobs during anti-Muslim riots in 2002.

Narendra Modi

Modi, 63, has denied any wrongdoing and an Indian Supreme Court-appointed panel investigating one documented incident found no evidence that he took decisions to prevent assistance from reaching those being attacked.

Most of the states won by the BJP are its traditional strongholds and the results there aren’t enough to indicate the outcome of the 2014 national polls, according to Nomura Holdings Inc. The party also lacks significant presence in the eastern and southern parts of India, analysts including Mumbai-based Sonal Varma wrote in a research report yesterday.

“Therefore, if anti-incumbency proves to be a core theme in the 2014 general election, it will clearly be to the Congress’s disadvantage overall although it does not follow that the BJP would necessarily be the main beneficiary,” the Nomura analysts wrote. The state results don’t “have any immediate impact on the fundamental economic outlook,” they wrote.

Economic Growth

Nomura predicts the economy will grow in a 4.5 percent to 5 percent range until the second half of 2014 compared with an average 8.2 percent quarterly expansion between 2000 to 2012. In the run-up to the state polls, Japan’s largest brokerage advised investors to buy the rupee saying Modi is perceived by investors as being more business-friendly, while Goldman Sachs Group Inc. recommended purchasing Indian shares.

Gross domestic product increased 4.8 percent in the July-September period, official data show. The Reserve Bank predicts 5 percent expansion in the 12 months through March 2014, matching the previous fiscal year’s pace that was the slowest since 2003.

“It is economics that has to take centerstage irrespective of the political group,” Philipp Good, who manages $800 million including Indian debt at Fisch Asset Management Ltd. in Zurich, said in Dec. 6 telephone interview. “Financial market stakeholders are going to support anyone who can bring respite and eventually take India out of the sluggish growth phase.”

‘Compromise, Delay’

In the latest regional polls, the BJP wrested the western Rajasthan state from Congress and retained power in Madhya Pradesh and Chhattisgarh, according to votes tallied by the Election Commission of India. In Delhi, the BJP had 31 seats against 28 for the Aam Aadmi Party, which campaigned against corruption in contesting its first election. The incumbent Congress party had 8 seats in the capital. Counting in Mizoram state began yesterday.

“India’s state elections confirm our view that the BJP will find it tough to win a strong enough majority next year,” Miguel Chanco, an economist at Capital Economics Ltd. in Singapore, said by telephone yesterday. “If Modi wins the premiership, he will almost certainly need support from fickle regional parties. As such, compromise and delay are likely to continue to characterize the policymaking process in India.”

To contact the reporters on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net; Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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