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Informist, Tuesday, Nov. 5, 2024

 

By Aaryan Khanna

 

NEW DELHI – Almost five months after India's national elections sprung a surprise, the domestic financial market is waiting to see how the US votes. Americans will queue up on Tuesday to decide if Vice-President Kamala Harris should be elevated to the hottest of hot seats in the White House or Donald Trump deserves a second bite of the proverbial cherry. With counting set to begin in the early hours of Wednesday, Indian traders across asset classes will be on tenterhooks before markets open. And analysts see little chance of good news for Indian bonds and the rupee, whatever the outcome.

 

"While a Trump presidency will be more noisy and volatile, we assess that a Harris presidency will not differ too widely in certain key areas," analysts from Emkay Global Financial Services said in a note.

 

Both Democrat Harris and Republican Trump are expected to be fiscally expansionary, which is seen driving long-term bond yields higher in the US--and consequently in India. Trump, however, is a bigger risk on fiscal profligacy based on his stated policies on taxes, tariffs and immigration. These are likely to drive global bond yields higher in the medium term. This would lead to a stronger dollar index, weighing on the Indian rupee in the medium term.

 

History shows foreign portfolio investors balked at investing in Indian assets after Trump was elected the US president. After being net buyers in the run-up to the 2016 elections, FPIs pulled out nearly $10 billion on a net basis from the Indian debt and equity markets in the last two months of 2016. The results of the next election, which saw Joe Biden defeat Trump in 2020, was more positive for India, with FPIs investing $18 billion in Indian markets in Nov-Dec 2020, up from $3 billion in the previous two months.

 

Foreign outflows have been more brutal this time around, particularly for stocks, with the threat of Trump returning to power resulting in over $11 billion exiting Indian shores in October. It is no surprise then that the Reserve Bank of India has had to step in aggressively: its foreign exchange reserves had fallen $20 billion between Sept. 27 and Oct. 25. But despite the Indian central bank’s efforts, the rupee has broken past 84-per-dollar and continues to inch lower.

 

While the Indian rupee is at record lows, US Treasury yields have been on the up. The 10-year US bond ended at 4.31% on Monday, 66 basis points higher than what it was trading at before the Federal Reserve cut interest rates by a surprise 50 bps in mid-September.

 

"If Trump wins, the US bond market is not going to love it," said Harsimran Sahni, head of treasury at Anand Rathi Global Finance. "Because you (US) are in the phase of monetary easing and fiscal expansion...that should eventually lead to steepening of the (bond yield) curve."

 

Unlike the rupee, Indian bonds have been fairly immune to the tribulations abroad, at least for the time being. Aided by robust economic fundamentals and positive demand-supply dynamics, the yield on the benchmark 10-year bond has risen by just 8 bps over the last month despite domestic inflation jumping to a nine-month high of 5.49% in the interim and the RBI pushing back on the market’s expectations of an interest rate cut in December.

 

While any post-election volatility in the US will lead to some bleeding for Indian debt and the currency, the new US president's polices will dictate flows in the medium term. And Trump’s volatile nature does not inspire confidence.

 

"If Trump wins, we could see the active FPI flows slow down because of his policies," said Akhil Mittal, senior fund manager – fixed income at Tata Mutual Fund. "If Harris wins, then the global risk appetite will be better and we could continue to see flows into emerging markets. But overall, I think we (Indian bond yields) will remain range-bound; it could be more of a table discussion rather than a big market mover immediately."

 

On the whole, a win for Trump is seen as being more inflationary, "possibly leading to a more cautious Fed and a strong dollar", YES Bank economists said, adding that a win for Harris could weaken the greenback.

 

Ahead of the opening of the polling booths across the US, the rupee is trading near a record low of 84.1225 a dollar, while the yield on the benchmark 7.10%, 2034 bond is 6.83%. A Trump victory would likely drive the 10-year gilt yield to as high as 6.95%, while the Indian currency could edge lower to 84.25 a dollar in the face of likely strong defence from the RBI. A Harris presidency, however, could lead to gilt yields cooling slightly by around 5 bps. The rupee may also recover somewhat to 84 a dollar, dealers said.  End

 

With inputs from Siddharth Upasani

Edited by Akul Nishant Akhoury

 

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