Mumbai: The Indian rupee and the 10-year bond prices closed higher on Friday as analysts expect Narendra Modi-led Bharatiya Janata Party’s landslide victory in the 17th Lok Sabha elections will give the government enough firepower to avoid populist measures.

The BJP won 303 of the 542 Lok Sabha constituencies, when most thought its 2014 tally of 282 was insurmountable

Also, benign retail inflation outlook, an expected rate cut, and hope of continued bond purchase by the Reserve Bank of India (RBI), boosted sentiment. However, analysts believe the rate cut will be a close decision due to global uncertainties, lack of clarity on monsoon and higher oil prices.

The rupee strengthened 0.7% to 69.53 a dollar. The 10-year bond yield closed at 7.225% compared with Thursday's close of 7.236%. Since the beginning May, bond yields have fallen nearly 20 basis points.

On Friday, India's benchmark Sensex rose 1.61% to 39,434.72 points.

"The bigger mandate for NDA this time will ensure a stable and pro-reform government for the next five years. We see government focusing on reflating the rural economy and also showing thrust on infrastructure spending, all measures to revive the cyclical slowdown", said Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Life Insurance.

Shah expects with favorable domestic and global environment in the near term, bond yields will trade with a downward bias. Also, RBI’s pro-active liquidity infusion and rate easing can push yields towards 7% in next 3-6 months. However, if oil prices move back above $75, expectation of a rate cut will moderate and yields may trade in a range, he said.

Traders will likely eye the next RBI policy, due on 6 June, and the Union Budget for fiscal deficit and borrowing targets.

"INR has also shown huge momentum gains. The momentum could sustain for the time being, pertinent on actual election outcome. Policy and political certainty will be good from foreign flows perspective, both FDI as well as FPI flows. However, it would also be contingent on overall global risk appetite amid current global market idiosyncrasies. That said, FPIs may attach a much lower risk premia on Indian assets as against the peer emerging markets if domestic dynamics stay positive", brokerage Edelweiss Securities said in a report.

Edelweiss said it will remain wary of renewed trade tension and China's currency volatility and sticky Brent prices, global risk appetite swings, and still-fragile fiscal state even as there is has been a marginal improvement in external accounts. It maintains that the Indian currency could weaken to 73.50 by end of calendar 2019.

So far this year, the rupee has risen 0.13% against the US greenback. During the period, foreign investors bought $9.51 billion in Indian equities and sold $446.80 million in debt market.

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