Indian rupee, bonds expected to rally after exit polls signal Modi victory

A customer holds hundred rupees Indian currency notes near a roadside currency exchange stall in New Delhi

By Dharamraj Dhutia and Jaspreet Kalra

MUMBAI (Reuters) - The Indian rupee and government bonds are expected to rally this week after exit polls signalled Prime Minister Narendra Modi's Bharatiya Janata Party would secure a third term, likely boosting investor confidence.

The rupee closed at 83.4625 on Friday, down 0.4% on the week.

The rupee "should open higher on Monday and appreciate over the next day or two but could face some resistance near 83.10," a foreign exchange trader at a state-run bank said.

While the polls signalled a strong showing for the ruling National Democratic Alliance (NDA), investors will wait for the actual election results on June 4 as exit polls, which are conducted by polling agencies, have a patchy track record in India, analysts said.

The rupee should gain "as we will see dollar inflows on foreign funds buying domestic equities and debt," Dilip Parmar, a foreign exchange research analyst at HDFC Securities, said.

Most exit polls projected the ruling NDA could win a two-thirds majority in the 543-member lower house of parliament, where 272 is needed for a simple majority.

Exit polls have a patchy track record in India but will nevertheless boost market sentiment, analysts said.

Meanwhile, the 10-year Indian government bond yield ended at 6.9809% on Friday, marking its sixth consecutive weekly decline. It also posted its biggest monthly decline in four years.

Traders expect the benchmark bond yield to move in a 6.92%-7.00% range this week, if the actual election results are in line with the exit polls.

"The 10-year benchmark bond yield may touch 6.94%-6.95%, and may move to 6.90% towards the middle of the week," said Vijay Sharma, senior executive vice president at PNB Gilts.

Covering of short positions could push the benchmark yield below the 6.95% mark briefly on Monday, traders said.

Likely fiscal consolidation and excess cash balances held by the government "augur well for a reduction in the market borrowing programme and a consequent rally in bonds," said Rajeev Pawar, the head of treasury at Ujjivan Small Finance Bank.

Traders expect the focus to then shift to the Reserve Bank of India's monetary policy decision due on Friday.

KEY EVENTS: ** HSBC India May manufacturing PMI - June 3, Monday (10:30 a.m. IST) ** U.S. May S&P Global global manufacturing PMI - June 3, Monday (7:15 p.m. IST) ** U.S. May ISM manufacturing PMI - June 3, Monday (7:30 p.m. IST)

** India national election counting of votes - June 4, Tuesday (8:00 a.m. onwards)

** U.S. April factory orders - June 4, Tuesday (7.30 p.m. IST)

** HSBC India May services PMI - June 5, Wednesday (10:30 a.m. IST) ** U.S. May S&P Global services and composite PMI - June 5, Wednesday (7:15 p.m. IST)

** U.S. May ISM non-manufacturing PMI - June 5, Wednesday (7:30 p.m. IST) ** European Central Bank policy decision - June 6, Thursday (5:45 p.m.) (25 bps rate cut expected) ** U.S. April international trade - June 6, Thursday (6:00 p.m. IST)

** U.S. initial weekly jobless claims - June 6, Thursday (6:00 p.m. IST)** India policy rate decision - June 7, Friday (10:00 a.m. IST) (rates expected to remain unchanged) ** U.S. May non-farm payrolls and unemployment rate - June 7, Friday (6:00 p.m. IST)

(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Subhranshu Sahu)