MUMBAI: Indian bonds and the rupee rallied on Monday after Finance Minister Arun Jaitley said the government would stick to its fiscal deficit target of 3.5 percent of gross domestic product for the 2016/17 year.

Traders had feared India would widen its fiscal deficit target for the next fiscal year to increase spending.

India's benchmark 10-year bond yield fell around 5-6 bps to 7.68 percent from levels before Jaitley disclosed the fiscal deficit target. The yield had closed at 7.78 percent on Friday.

The rupee strengthened to 68.61/62 from around 68.70 levels. It had ended Friday at 68.62/63.

But shares were down, with the NSE index falling 0.7 percent after some state-run lenders declined as Jaitley announced lower-than-expected capital injections to the sector. Punjab National Bank fell 1 percent.

Copyright Reuters, 2016