BJP, PM Modi, stock market: Morgan Stanley identifies 2 key debates, 5 events to watch

Stock market, Election results 2024: Foreign brokerage Morgan Stanley said the Prime Minister Narendra Modi-led BJP might have fallen short of majority but its base case is that the NDA is likely to form the next government, adding that its medium to long-term view on stocks do not change. 

In its India Equity note, the foreign brokerage said unresolvable disagreements within the NDA coalition are not priced in by the stock market. Morgan Stanley said contrary to what was priced in the equity market, the BJP has fallen short of a majority in Parliament (272 seats) with around 240 seats. The National Democratic Alliance, however, has passed the halfway mark. Therefore, the BJP-led NDA is likely to form the next government, it said. 

Two key debates
Among the two key debates following the election outcome, the first is whether the pace and direction of reforms slow or change. Morgan Stanley said any change is unlikely. Most of the likely reforms in the coming five years are in the arena of execution rather than law changes, it noted.

The another debate would be around whether the focus on macro stability -- which has driven down inflation and asset market volatility, would change. Prima facie evidence suggests that the BJP's near 60-seat loss from 2019 is largely down to local and non-economic issues, MOrgan Stanley said as it expects the BJP-led NDA government may not sacrifice macro stability as its anchor to economic policy. 

5 key events
Morgan Stanley said the government and cabinet formation over the next few days will be keenly watched. It said the RBI policy outcome on June 7 will be watched keenly. For now, it expects no change in policy rate. 

"Liquidity conditions should improve as government spending resumes after elections," it said.

Besides, investors would follow the onset of the monsoons – rains this year are expected to be above average.

Morgan Stanley said the Union Budget is likely in early July and noted that the interim budget pegged the deficit at 5.1 per cent with capital spending growth exceeding social expenditure. 

"Since then, the actual trailing deficit was 20 bps lower than estimate and the RBI dividend cheque has added about 30 bps to revenues. How the government uses this extra 50 bps plus the final estimate for the deficit will be key information. In our base case, we do not expect an increase in populist spending," it said.

Finally, investors would focus on earnings season that starts in the second week of July, Morgan Stanley said.