The possibility of NDA continuing in the government, and offering political stability, would be a strong pull for foreign investors to put their money in Indian assets, and the swing in equity indices reflected that.
Sensex rose 1421.9 points, and Nifty 50 rose 421.1 points, both up 3.7 per cent from the previous close. The rupee reflected that sentiment, strengthening to close at 69.74 a dollar, from its previous close of 70.23 a dollar. In the morning trade, the rupee had strengthened to 69.45 a dollar, but weakened subsequently as importers, including oil marketing companies rushed in to buy cheaper dollars for their future commitments. Exporters were also seen selling their dollars fearing the rupee to become stronger in the coming days.
Rupee had last seen a similar jump on March 18.
The strength in the rupee happened despite oil prices remaining firm on middle-east tensions. The dollar index, which measures the greenback’s strength against major global currencies, fell 0.07 per cent to 97.92. Other Asian currencies in the region also strengthened marginally, but not as close as the rupee. There is still some room for the rupee to improve, say experts.
Year-to-date, rupee has strengthened .038 per cent, aided by Monday’s performance. Most of the other currencies in Asia have remained weaker than their year-ago level against the dollar.
The 10-year bond yields also fell to close at 7.29 per cent, from its previous close of 7.36 per cent. Bond prices rise as yields fall.
“The markets reacted to the exit polls. If the final results are broadly in-line with the polls, the momentum of the rupee will continue in the short run,” said A Prasanna, chief economist of ICICI Securities Primary Dealership.
According to currency dealers, the Reserve Bank of India (RBI) was largely absent from the market, and let importers to hedge.
“Monday’s rupee movement has largely captured the actual event of the government getting formed. But the bias will continue towards a stronger rupee. However, if the actual number comes around 260-270 for the NDA, the markets may react negatively,” said Ritesh Bhansali, vice-president, Mecklai Financial.
“We saw lots of smart money moving in on Monday. If the NDA comes with a great majority, then foreign inflows will be strong and that may push rupee to 68-68.5 a dollar level,” he said.
The markets will start following policies and soundbites once the government is formed but till that time rupee is placed favourably, Prasanna said. If the NDA returns to power with a clear majority in line with exit polls, markets would rejoice the policy continuity, said Madhavi Arora, Economist, FX & Rates- Edelweiss Securities.
For the bond market, the near-term implications would be positive, backed by the predictable fiscal guidance, near-term inflation certainty, positive Gsec supply dynamics, strengthening further rate cuts expectations, and globally dovish monetary stance amid growth concerns, according to Edelweiss.