Rupee gains, bonds flat; foreign investors stay on sidelines

By Swati Bhat

MUMBAI (Reuters) - The rupee gained marginally while bonds were steady on Monday as investors stayed on the sidelines in a holiday-shortened Christmas week likely to see diminishing foreign fund flows.

Foreign funds are usually light on their investments towards the year-end and prefer to start investing fresh funds only at the beginning of the new year, leading to lower volumes in most markets globally.

Both debt and foreign exchange markets saw significantly low volumes in India but sharp gains in the domestic share market helped the rupee edge up.

Traders said the rupee could come under pressure on month-end demand from importers. For bonds, the movement in global crude oil prices will be crucial.

"Some month-end and quarter-end demand should push the rupee down later this week and next," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.

"The rupee's fall will be limited at around 63.60 levels."

The partially convertible rupee closed at 63.24/25 per dollar, slightly stronger than its Friday close of 63.2950/3050, while the benchmark 10-year bond yield closed steady at 7.96 percent.

The BSE Sensex and Nifty rose more than 1 percent to mark a third consecutive day of gains, while higher Asian shares and hopes of progress on key reforms underpinned the broader market.

In the overnight indexed swap market, the benchmark five-year swap rate closed 2 basis points lower at 7.31 percent, while the one-year rate fell 1 basis point to 7.88 percent.

(Reporting by Swati Bhat; Editing by Subhranshu Sahu)