BJP losses and new RBI governor raise policy risk

The state election results announced this week were a clear setback for Prime Minister Modi’s BJP, as they suggest that goodwill is fading ahead of next year’s general election. While we still think the BJP will win the general election, it is unlikely to take any risks, and there is now a strong possibility of a ramping up in fiscal giveaways. Meanwhile, the appointment of a government loyalist as the RBI’s new governor increases the risk of monetary policy being kept looser than is appropriate