Rupee strengthens on fund flow talk

The rupee gained, rebounding from a two-month low, on speculation rising relative yields on local bonds will spur overseas funds to boost investments. Foreign investors bought $3.3 billion of rupee-denominated government and corporate notes this year, bolstering holdings to an all-time high of $21.1 billion on May 10, according to data published by the Sebi.

The extra yield on 10-year rupee debt over similar-dated US Treasuries has jumped 67 basis points this quarter to 519 as the central bank accelerated interest-rate increases to cool inflation. “I like the yield advantage on the Indian rupee,” said Sergey Dergachev, who helps manage the equivalent of $9.6 billion of emerging-market debt at Union Investment Privatfonds in Frankfurt. “RBI accelerating its rate hikes makes it even more attractive . We remain invested in the rupee.” The rupee appreciated 0.2% to 45.055 per dollar from May 16 at the 5 pm close in Mumbai, according to data compiled by Bloomberg.

Indian financial markets were closed on Tuesday for a public holiday. The currency touched 45.185 on May 16, the weakest level since March 17. India’s higher yields, combined with the second-fastest economic growth among major economies, are prompting strategists to predict the rupee will provide the world’s best returns after the Peruvian sol. The currency will earn 18.5% by the end of 2012, including interest income, compared wit h 19.3% from the sol. The rupee also rose as local exporters bought the currency to take advantage of a favourable exchange rate after it slid 1.8% this month, said Vikas Babu, a currency trader at state-owned Andhra Bank.

A weaker local currency boosts the value of overseas earnings. Offshore forwards indicate the rupee will trade at 45.77 to the dollar in three months, compared with expectations of 45.87 on May 16. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.