Elections effect: rupee loses ground, gilts wilt

RECAP

Exit polls forecast of a hung Parliament weighed heavily on the forex and government securities market last week.

The 10-year benchmark 7.37 per cent 2014 security went up to 5.11 per cent against its week before close of 5.07 per cent. Later it went up to a high of 5.1450 per cent.

The market was closed on Monday, when Mumbai went to polls. According to dealers, the market had reacted to the exit polls but is expected to stabilise, since liquidity is high.

Traders fear that with a hung Parliament, a new government will be unable to push tough reforms, foreign funds may start selling their holding, leading to a fall in money market surpluses that have supported bonds in the face of strong economic growth.

Already foreign exchange inflows have started drying up owing to the uncertainty on the political front.

Corporate bond yields also rose as traders last week cut positions after exit poll results from the third phase indicated that the ruling coalition may fall short of winning a majority in the Parliament. Deals struck last week hovered in the range of Rs 150 crore,much below volumes of Rs 400-500 crores recorded in the previous few weeks.

However , towards the end of the week, bonds stablised with the 10-year paper loosing three basis points in a day on Friday to close at 5.11 per cent against a high of 5.14 per cent. Prices of gilts on the long end fell by 40-50 paise, whereas in the medium term, it fell by 20-25 paise.

The spot rupee, on the other hand, opened firmer at 44.36/38 on dollar sales from state banks. However, it further depreciated to 44.53 per cent owing to month-end demand from importers.

However given the weak sentiment following the political uncertainty, rupee is unlikely to extend its gains further, feels the market. Forwards continued to trade at a discount on persistent cash-dollar shortage and, hence, the buy-sell swaps by banks.

In the following trading sessions, the dollar rose 26 paise or 0.6 per cent against the rupee on the back of heavy buying by oil companies and the defence sector. Corporate demand also weighed heavy on the market as corporates felt that the US currency was bound to appreciate in three to six months.

After the gains, the dollar closed at Rs 44.41/42 on Thursday, significantly higher than Wednesday's close of Rs 44.15/16, backed by strong month-end dollar demand from importers.

Dealers said that besides dollar demand from importers, the Reserve Bank of India too stepped in to support the dollar, which widened the shortage in the cash dollar market and strengthened the spot dollar.

Further, reigning cash dollar shortage, political uncertainty and dollar's gains overseas also weighed on the rupee. The discount on the forward dollar/rupee rose on buy-sell swaps by banks and weak spot rupee.