Bond, rupee strengthen as exit polls predict comfortable majority for NDA

The rupee and government bonds on Monday strengthened following exit polls predicting a decisive victory for the incumbent Bharatiya Janata Party-led National Democratic Alliance (NDA) in the Lok Sabha elections.

The 10-year benchmark government bond yield softened 6 basis points to settle at 6.94 per cent on Monday, the lowest since April 7, 2022.

The rupee gave up some early gain after reaching a more than a two-month high during the day. The local currency appreciated to Rs 82.96 against the dollar in early trade, witnessing the highest intraday gain since December 15, 2023.

The rupee settled at Rs 83.15 on Monday against Rs 83.47 a dollar on Friday.

The Reserve Bank of India (RBI) intervened in the foreign exchange market to mop up dollars to contain volatility in the exchange rate, said market participants.

“The RBI bought dollars at around Rs 83. It could have bought around $200 million,” said Anindya Banerjee, vice-president (currency derivatives and interest rate derivatives), Kotak Securities.

“Tomorrow (Tuesday) the rupee is expected to appreciate more, and the RBI will have to intervene in the market,” he added.

Most exit polls have predicted 350-400 seats for the NDA. Votes will be counted on Tuesday.

ALSO READ: Real Estate shares rally on Modi 3.0 boost; Nifty Realty index soars 6%
 

“If they (the NDA constituents) manage more than 400 seats, ideally the rupee should be around Rs 82.50, but it is on the RBI. But there is a strong case for Rs 82.50,” said Banerjee.

Bond-market participants said the number of seats should not affect the markets. The expectations of reduction in borrowing numbers are expected to drive positive sentiment among the traders.

“Overall the market has shown a strong demand and traders were able to push the price higher by another day. So that momentum should continue towards a stronger opening tomorrow (Tuesday),” said Naveen Singh, vice-president of ICICI Securities’ primary dealership.

“As of now there is an expectation that there can be some reduction in borrowing, given the higher dividend from the RBI and some savings coming in from last year because of a higher cash balance. So that will keep the optimism going up into the debt during this month,” he added.

Additionally, foreign inflows on the back of JP Morgan bond Index inclusion are expected to have a favourable impact on yields.

In September 2023, JP Morgan had announced it would include government papers, issued by the RBI under the Fully Accessible Route (FAR), in its widely tracked GBI-EM. The inclusion process will start on June 28 and will be phased over 10 months, with a 1 per cent weighting included each month until March 31, 2025.

Indian bonds will have a 10 per cent weighting, similar to China’s.