Hopes that Modi will usher in structural reforms has led to a strong rally across Indian asset classes. This short-term rally will likely fade as investors return focus to economic fundamentals and earnings.
Modi will stick to his winning policy mix of welfarism with limited, gradual reforms. After the initial euphoria, investor attention will switch to worrying economic fundamentals. GDP growth has slowed to its weakest pace in 5 years and global headwinds are rising. Falling consumption and slow investment imply that 7%-plus GDP growth will be a challenge. A more accommodating RBI leadership will continue to ease policy rates and banking norms. Creating jobs, improving rural incomes and reviving credit growth will be Modi's key priorities. Structural reforms in land and labour markets, and privatization of banks are unlikely.
That scenario has played out exactly and India is now in the midst of an investment and consumption slowdown. The RBI has continued to ease monetary policy, with anuncharacteristically large 35 bps cut in August. A fiscal stimulus package is also planned. Sensex fell 6% from 39,615 on 6 June to 36,976 on 6 August 2019.