State elections in West Bengal, Tamil Nadu, Kerala, Assam, and Puducherry sprang a few surprises. The centre’s ruling party BJP witnessed a decisive and historic breakthrough in West Bengal (from 3 seats in 2016 to over 200 in 2026), upending the current regional party that had been entrenched in the state apparatus for a decade and half. This marks an expansion in the ruling party’s reach beyond its traditional strongholds, expanding its pan-India presence and strengthening its position. The party also returned for a third term in Assam. Concurrently, there was also a noticeable shift toward a new, non-traditional TVK party in the crucial state of Tamil Nadu, which marked a departure from long-held duopoly of two regional parties, and pointed to a sharp shift in voter preferences. Congress-led UDF took the lead in Kerala, shifting away from a decade long run by the incumbent LDF party.
State specific issues, typically including welfare schemes, cash support, provision of basic amenities, law & order, minority groups’ rights and women reform policies etc resonate with voters on the ground. State budgets have witnessed a sharp rise in welfare and populist spending in recent years, structurally lifting deficit ratios past 3% of GDP threshold in FY26 and likely FY27, also reflected in widening SDL spreads. A host of populist promises were also made in the run-up to these polls, which will add to the potential fiscal strain this year. Sectors like railways, infra, defence spending, industrial electrification, ports, and manufacturing are expected to benefit from this shift.
Beyond the election results, markets eye the likelihood of an increase in the domestic retail fuel prices, as Brent prices stay stubbornly above $100bl. Pump prices were last raised in March 2022, followed by excise cuts in May 2022 and another price reduction in March 2024. INR asset markets are still beholden to global developments, especially absence of concrete progress in the US-Iran negotiations and delay in reopening of the SOH. USDINR was back up towards the 95 handle this week, on the back of persistent foreign portfolio outflows from the equity market (-$5bn this FY and -$0.7bn from debt) and we expect further upside given the unfavourable risk backdrop. Press reports cited ongoing discussions within the central bank to boost FX buffers and draw inflows, including a facility to attract non-resident inflows and removal of withholding tax on offshore bond investors. A double whammy for inflation by way of impending El Nino risk and consequent impact on this year’s summer monsoon is also a concern. The next forecast update by the meteorological agency will be watched with interest. Benchmark bond yields are also expected to stay bid as markets price in tightening moves and risks to the fiscal outlook on account of higher subsidies.
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