“Gloomy Macro May Drown Electoral Cheer,” Says Kotak Securities



“Gloomy macro may drown electoral cheer,” says Kotak Securities

The oil surge to multi-year highs, the rupee hitting an all-time low, and the economic impact from the escalating Russia-Ukraine conflict will keep any cheer from the electoral continuity limited, according to Kotak Securities.

The Bharatiya Janata Party (BJP) is likely to score Uttar Pradesh again, while the Aam Aadmi Party (AAP) would scoop Punjab, according to a poll of exit polls.

“Gloomy macro may drown electoral cheer. Exit polls suggest a strong electoral performance by the BJP in Manipur, Uttar Pradesh and Uttarakhand, AAP to win Punjab and Goa to have a hung assembly. However, the market may not take a victory lap as the broader macro-economic outlook looks grim,” noted analysts at Kotak Securities.

“Exit polls suggest BJP may win comfortably in Uttar Pradesh and may also win Manipur and Uttarakhand. While markets will find comfort in the results and resultant political and legislative stability, the current grim macro outlook may limit any euphoria,” they added.

Experts have warned the impact on the already slowing economy will be significant as the Russia-Ukraine conflict has pushed crude oil prices to near multi-year highs and a surge in commodity prices across the board.

That is likely to widen the current account deficit on increased import bills as the country relies on buying oil from outside of the country for about 80 per cent of its needs. What is also going to hurt is the depreciating rupee.

“Crude cost of someone else’s war. An average crude price of $120 per barrel in FY2023 will cost the Indian economy $70 billion, increase average consumer prices inflation by 80 basis points and negatively impact growth,” noted Kotak Securities’ analysts.

“We expect retail fuel prices to move up to market prices soon gradually. The government may also have to reduce excise duties of diesel and gasoline, increase minimum support prices (MSPs) sharply and spend higher-than-allocated amounts in rural and social sector schemes to provide some buffer to economically-weaker households.”

Supply-driven inflation has been India’s bane, and even as the world is still reeling from the coronavirus-led disruptions to supply chains, the Russia-Ukraine war would only exacerbate that further.

Those risks have suggested stagflationary risks, with high price pressures and a slowing economy being the norm, which will likely limit markets’ euphoria for continuity based on the projected electoral win.

“Macro headwinds may limit the euphoria of a BJP win for markets. In our view, the increasing risks of elevated and persistent energy prices and its resulting impact on various macro parameters will remain the dominant theme in shaping the market direction in the near term,” according to the Kotak Securities report.

“Market valuations, though palatable, do not completely reflect risks to earnings downgrades. Market multiples appear ‘expensive’ relative to history and bond yields, despite the sharp correction in recent weeks,” the report said.