Rupee, bond slump as ruling BJP fails to secure majority on its own

Market expected strong opening by the ruling alliance, say one bond dealer

The rupee and bonds slumped on Tuesday as the ruling Bharatiya Janata Party (BJP) did not manage to get a simple majority in the general elections — contrary to what the exit polls predicted.

However, the BJP-led National Democratic Alliance (NDA) was able to cross the majority mark — including leads.

This prompted the rupee to settle at Rs 83.53 versus the dollar, against Rs 83.14 on Monday. The local currency witnessed its worst fall since February 6, 2023.

The Reserve Bank of India (RBI) intervened in the foreign exchange market through dollar sales. This protected the rupee from hitting the record low of Rs 83.57 per dollar, said market participants.  

The yield on the benchmark 10-year government bond settled at 7.04 per cent, against 7.94 per cent on Monday, witnessing the steepest single day rise in benchmark yield since October 6, 2023. The most traded 7.18 per cent 2033 bond settled at 7.11 per cent, against the previous close of 7 per cent.

Market participants expect the volatility in the rupee market to continue until the presentation of the full Budget in July.

“The reason for the jitters in the market was that the NDA got a very tight majority which was not expected. The market was positioned for a good majority by the NDA,” said V R C Reddy, head of treasury, Karur Vysya Bank.

“The volatility trajectory in the market will continue until the full Budget in July. The RBI will be present in the foreign exchange market, as there is expectation of further depreciation. It is because of the ruling party’s numbers and the RBI will not allow any sharp depreciation,” he added.

Bond market participants expect the yield on the benchmark bond to rise in the near term before stabilising below 7 per cent.

“The benchmark bond yield will stay below 7 per cent. I expect the pressure to continue in the near term but overall, the interest rates are on a downward trajectory. But in the near term, the yield can go up by maybe another 10-12 basis points (bps) and then resume there,” said Vijay Sharma, senior executive vice-president at PNB Gilts.

The expectation of reduction in borrowing numbers may drive positive sentiment among traders during the month. Additionally, foreign inflows on the back of JP Morgan bond Index inclusion is expected to further weigh on yields.

In September 2023, JP Morgan had announced it will include government papers, issued by the RBI under the Fully Accessible Route (FAR), in its widely tracked GBI-EM.

The inclusion process will start from June 28 and be phased over a 10-month period with 1 per cent weight included each month until March 31, 2025.

Indian bonds will have 10 per cent weight, similar to China.