Rupee strengthens on hopes of lower trade gap

The rupee strengthened for a second day on speculation an increase in foreign capital inflows into local shares will help offset a widening trade deficit.

Overseas investors bought a net $12.9 billion of Indian stocks so far year, helping to push the Sensex to a two-and-a-half-year-high on August 19. India’s trade deficit widened to $43.6 billion in the April through July period, compared with $31.4 billion in the same period a year earlier, government data published on Tuesday showed.

“We are still expecting a gradual appreciation of the Indian rupee, but it’s a tussle between strong inflows and the current-account deficit,” said Richard Yetsenga, the Hong Kong-based global head of emerging-markets currency strategy at HSBC Holdings.

The rupee appreciated 0.2% to 46.72 per dollar at the close of trade on Thursday. It gained 0.6% on Wednesday, the most in more than two months.

India’s current-account deficit, which includes inflows from software companies and overseas remittances, widened to a record $13 billion in the first quarter. Offshore forward contracts indicate the rupee will trade at 47.35 to the dollar in three months, compared with expectations for 47.48 on Wednesday.