Rupee gains, bond yields fall due to poll results, optimism

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The rupee gained on Monday, after the Bharatiya Janata Party (BJP)'s success in two state elections and the government's removal of diesel subsidies and an increase in natural gas prices sparked hopes for further reforms.

Government bond yields fell to a one-year low on expectation that the removal of diesel subsidies and rise in natural gas prices would help reduce fiscal subsidies.

The rupee ended at 61.36 to the dollar, compared with the previous close of 61.44. During intra-day trade, it touched a high of 61.18. It had opened at 61.21. The yield on the 10-year benchmark bond ended at 8.36 per cent, compared with the previous close of 8.39 per cent. The yield had ended at 8.19 per cent on September 19, 2013.

On Saturday, the government lifted diesel price controls and raised the cost of natural gas, giving market forces greater sway. Prime Minister Narendra Modi's BJP also made big elections gains in Maharashtra and Haryana, an endorsement likely to encourage him to step up the pace of economic reforms.

“For the rest of the month, the rupee might trade in the range of 61.10 to 61.90. Today, there were bids from oil marketing companies; else, the rupee would have gained more. The Reserve Bank of India (RBI) did not intervene,” said a currency dealer with a state-run bank.

The rupee gains were helped after shares rose a little more than one per cent on Monday, their biggest daily gain in a week. The currency and bond markets are open for only three days this week, till Wednesday.

Bond traders believe the 10-year bond yield is moving towards 8.3 per cent but also expect that at some point, RBI might announce a sale of government securities through open market operations (OMOs). “RBI does not want yields to fall sharply. It might announce OMOs, due to which there would be corrections,” said a bond trader with a state-run bank.