The Street had factored in the NDA win, owing to which the appreciation in the rupee is expected to be limited
The fact that exit polls on Monday showed a Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) was set to form the government at the Centre was likely to help the rupee open about 25 paise higher on Tuesday, dealers said. The Street had factored in the NDA win, owing to which the appreciation in the rupee is expected to be limited.
Flows from foreign institutional investors into domestic markets will continue, but the Reserve Bank of India (RBI)'s intervention through state-run banks will limit gains for the rupee.
On Monday, the rupee closed at 60.05/dollar, compared with its previous close of 60.03/dollar. During intra-day trade, it touched 59.52/dollar, its strongest since July 29.
The results of the general elections will be declared on Friday.
J Moses Harding, group chief executive (liability and treasury management) & chief economist, Srei Infrastructure Finance, said: "The market has factored in an NDA majority, due to which the rupee is seen trading in the range of 59-60.5/dollar.
However, if the BJP would have got majority, the rupee could have appreciated even to 58.5/dollar. But beyond that, the rupee might not appreciate because there will be dollar demand from importers and the hedge of external commercial borrowings; also, RBI might intervene. There are fears the ban on gold imports might be lifted, due to which the rupee might weaken."
Said the head of treasury of a state-run bank: "Today (on Monday), RBI intervened in the market through state-run banks, due to which the rupee ended marginally weak. The intervention of RBI will continue; it will be mopping up dollar flows to boost foreign exchange reserves. The rupee may open stronger by about 25 paise on Tuesday."
In the last few months, RBI has been active in buying dollars; it hasn't allowed the rupee to strengthen beyond 60/dollar. Central bank officials, however, maintain they do not have any particular level for the rupee in mind, adding intervention is only aimed at curbing volatility. According to latest data, RBI purchased $8.75 billion from the spot market in March, the most since November, when there were fund flows of about $10 billion, primarily due to RBI's foreign currency non-resident (bank) swap scheme.
Meanwhile, a rally in the bond market isn't expected, as Consumer Price Index (CPI)-based inflation for April stood at a three-month high of 8.59 per cent, primarily driven by higher food prices. CPI inflation for March stood at 8.31 per cent.
On Monday, the yield on the 10-year benchmark government bond closed at 8.73 per cent, compared with the previous close of 8.75 per cent.