As the Modi government won the second term with an even greater majority, the investors’ trust in public finances has improved. The 10-year government bond (also called G-Sec) yield decreased to below 7 percent which is lowest since November 2017. The reasons behind the positive trend in bond yield were falling crude oil prices and speculation of rate cut by the Reserve Bank of India in next bi-monthly policy which is to be released on this Thursday. The investors expect the newly elected majority government to be more prudent regarding government finances as the target is to bring the fiscal deficit down to 3 percent of GDP. After PM Modi’s re-election, foreign inflows reached new high and this helped in sudden fall in bond yield.
The positive trends were also visible in other macroeconomic indicators for example rupee hit 69.27 per dollar, a month high and 0.63 percent higher than the previous closing point. Sensex, the benchmark index of Bombay Stock Exchange crossed the 40,000 mark for the third time, after crossing the psychological mark on general election results day and oath taking ceremony day. It rose by 1.39 percent to reach 40,267.62 points which is the highest tally by Sensex.
“With the slowdown in growth, muted inflation, and political stability with limited chances of excessive fiscal populism, we believe the odds of a June rate cut by the monetary policy committee (MPC) are now significantly higher,” said Nirmal Bag. Crude fell by 3 percent on Friday due to aggressive US trade policy, the prices has declined by 13 percent in the last five trading sessions.
In the next few months, the Modi government is expected to be aggressive on privatization. The Modi government may privatise 46 CPSEs in the next few months, said NITI Aayog Vice Chairman Rajiv Kumar. The Modi government will also reform the labor laws and will create land banks to accelerate the process of industrialization. “They (foreign investors) will have reasons to be happy. You will see a slew of reforms I can assure you of that. We are going to pretty much hit the ground running,” said Kumar to Reuters in an interview.
With the new finance minister at the helm of state affairs, some path-breaking reforms are expected. The newly constituted parliament will start functioning from 17th June and the budget would be presented on 5th July. The Economic Survey which was stalled as the Modi government was seeking re-election will be tabled a day before the budget presentation. As far as economic reforms are concerned, “We should (start with the banks)..There will be big bang, there will be 100 days action. We are all geared for that … I have maintained that the fiscal policy should be counter cyclical. There is scope for that,” said Kumar.
The Modi government took painful reforms like demonetization and GST implementation to restore the strong macroeconomic fundamentals in the country. Today fiscal deficit is low, foreign exchange reserves are at a new high, and economic growth is predicted to go upward in upcoming years given conditions remain constant. The economic reforms like GST implementation, IBC, and social sector spending, improved ease of doing business will contribute to the economic growth of the country in the future. So, the Indian economy will grow at a good pace in upcoming years as fundamentals have been strengthened in the firm term.