(Photo: Abhijit Bhatlekar/Mint)
(Photo: Abhijit Bhatlekar/Mint)

Rupee, bonds rally as exit polls predict NDA return

  • Rupee posts biggest single-day gain since 19 March, bond yields hit seven-week low
  • The rupee jumped 0.7%, its biggest single-day gain since 19 March to close near a 2-week high

The rupee and bonds surged on Monday after exit polls predicted the Narendra Modi-led government returning to power for a second term.

The Indian currency jumped 0.7%, its biggest single-day gain since 19 March to close near a two-week high. Bond yields fell 8 basis points, the most since 2 April, to hit a seven-week low. Bond prices and yields move in opposite directions.

The rupee, which opened over 1% higher, erased some gains, tracking losses in Asian currencies amid tensions surrounding the US-China trade talks, and rise in oil prices, as the Organization of the Petroleum Exporting Countries is likely to maintain a production cut in 2019.

The rupee closed at 69.74 a dollar, up 0.7% from its previous close of 70.22. The Indian currency opened at 69.43 a dollar. The 10-year bond yield was at 7.287%, compared with Friday’s close of 7.364%.

“Return to power with a majority bodes well for policy/reform continuity and addresses a key domestic event risk. This optimism helped Indian markets overwhelm weaker global risk sentiments at the start of this week," said Radhika Rao, an economist at DBS Bank.

The Bharatiya Janata Party-led National Democratic Alliance is likely to win over 300 seats in India’s 543-seat lower house, according to many exit polls. The opposition, the Congress-led United Progressive Alliance, will win an estimated 132 seats, exit polls showed.

If the projections hold true, it would be the first time that the BJP would come back to power after completing a full five-year term. This is significant because, so far, only the Congress has managed to retain power for consecutive terms.

Rushabh Maru, research analyst, currency and commodity, Anand Rathi Shares and Stock Brokers, said if exit polls match the actual outcome, the rupee may head towards the 68-level in coming sessions.

Analysts said bond yield and the rupee will be under pressure in the near term due to rising global crude oil prices. Brent crude has surged in 9 out of the past 12 trading sessions and is up 2.56% during the period. So far this year, it has surged 35%.

“Today’s flow was due to interest from expected overseas interest in rupee assets. Market may not move much if results come along expected lines. However, if it doesn’t or if there is instability in the government, then there could be a bloodbath. If the flows continue to come, there is likelihood that the Reserve Bank of India may use this opportunity and reduce volatility," said Ashutosh Khajuria, chief financial officer, Federal Bank Ltd.

Edelweiss Securities, in a note to investors, said: “Markets are already rejoicing the expected political stability, with all asset classes responding very well to the exit polls. For bonds 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."

“INR has also shown huge momentum gains today. The momentum could sustain, 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 lower risk premia on Indian assets against peer EMs if domestic dynamics stay positive. Overall, we remain wary of renewed trade tension and CNH volatility and sticky Brent prices, global risk appetite swings, and still-fragile fiscal state, despite marginal improvement in external accounts. For now, we maintain the INR could drift to 73.50 by end-CY19 and see it average ~72.50 in FY20," it added.