Nov. 14 (Bloomberg) -- India's rupee rose, ending two days of losses, as a rally in the benchmark share index stoked optimism overseas investors will buy more local equities.

The currency traded near the highest in almost a decade as the Bombay Stock Exchange's Sensitive Index, or Sensex, gained the most in more than three weeks. Purchases of local shares by funds based abroad more than doubled this year from 2006, according to the Securities & Exchange Board of India.

``The overall view is that global investors are confident of India's strong growth,'' said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank Ltd. in Mumbai. ``That should keep the rupee in an appreciation mode.''

The rupee rose 0.3 percent to 39.305 per dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. Its 12.5 percent advance this year is the second-best performance by an Asian currency after the Philippine peso.

The median forecast of 24 economists in a Bloomberg News survey predicts the rupee will rise to 39.21 by year-end and 39 by the end of March 2008.

The Sensex climbed 4.7 percent today, the most since Oct. 23. The index is headed for a sixth annual gain as stock purchases by global funds have reached a record $16.8 billion this year, compared with $8 billion in 2006.

Asia's third-largest economy has grown an average 8.6 percent since 2004, the fastest pace since independence in 1947. It will expand by almost 9 percent in the fiscal year ending March 31, Finance Minister Palaniappan Chidambaram said today.

Central Bank

The rupee also rose on speculation economic growth will attract more long-term investment from overseas. Monthly inflows of foreign direct investment averaged $1.4 billion during the first four months of the current fiscal year that started April 1, compared with $712 million a year earlier.

The currency pared gains on speculation the central bank will sell it to prevent the rally from eroding export earnings.

India on Nov. 7 increased the limit on the amount of debt the central bank can sell to drain excess funds from the system generated from rupee sales.

The move to raise the limit on the so-called stabilization bond sales by the Reserve Bank of India ``has signaled potentially larger currency market intervention by the central bank,'' Priyanka Chakravarty, a foreign-exchange strategist at ICICI Bank Ltd. in Mumbai, said in a research report.

The Reserve Bank yesterday said it bought a record $11.9 billion of foreign currency in September, its 11th straight month of purchases. The bank bought $51.8 billion in the nine months through September and $34.8 billion in the first half of the fiscal year to March 31. The purchases boosted India's reserves to an all-time high of $266.5 billion as of Nov. 2.

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Anil Varma in Mumbai at avarma3@bloomberg.net.

Last Updated: November 14, 2007 07:22 EST