India's BJP not Feeling the Love in Bihar Election

As the Hindi saying goes:  If you reside in the water, do not make an opponent of the crocodile.

The ruling party in India, the BJP, was conquered in the Bihar state assembly elections.  The actual party came out with 59 chairs out of 243, down 35 chairs from the previous elections and substantially worse than expected.  Many were looking at the Bihar elections as a referendum associated with sorts on Modi’s very first 17 months in power. 

Much of the debate in Bihar revolved around the national debate more than Modi’s perceived hard collection against Muslims and political dissent, made even more salient by the death of four Muslims supposedly attacked through mobs of Hindus.  Now the bad results will set the tone for that multiple subsequent elections that will adhere to, emboldening the opposition, and raising serious questions about the BJP marketing campaign strategy.  Perhaps Modi will soften up his tone as well as sound more conciliatory towards the Hindu-Muslim tensions, but it may be too late in order to reshape his image.

More objectively, regional elections matters because the make up of the state assemblies determines party representation in the Rajya Sabha, the Upper House.  In addition, it is presently there that the opposition is blocking the government.  Now the focus becomes back to implementation – the age-old condition in India.  Despite good motives, it is becoming harder to see how Modi will be able to push through their reformist agenda.  Recent defeats possess included the nationwide products or services tax and land change.

All that said India still has several positives going for it.  Rajan in the helm of the central bank will still be a solid anchor for the country’utes macroeconomic management and banking field reform.  Oil prices from these levels are very favourable for the country’s external account.  The election results are not enough to completely counter our relatively favourable view, but it definitely curbs our enthusiasm.  At the minimum, it means that Modi will have to take more time and energy on campaigning and less on pushing economic reforms.  It also may mean that he will need to refocus his priorities towards addressing social tensions.

Indian assets prices reacted accordingly, however INR suffered the most. After starting down 2.3%, the Sensex recovered to close down only 0.5%.  Local swap rates had been up as much as 12 british petroleum, back to levels seen in late September, undoing the fall in yields that followed the more-aggressive-than-expected 50 british petroleum cut by the RBI on September 29.  USD/INR gapped higher to Sixty six.45 – less than 1% from September highs and 3.5% from Sept 2013 all-time highs.

India Election Outcomes Sours the Mood is republished with authorization from Marc to Market