Oct. 25 (Bloomberg) -- India's rupee gained as the nation's capital markets regulator prepared to detail its proposed curbs on overseas investment in local stocks.

The currency advanced for a third day as Finance Minister Palaniappan Chidambaram said this week that the proposals to curb trading in offshore derivatives are aimed at improving transparency rather than banning types of funds. The benchmark stock index rebounded 6.9 percent this week following a drop of 4.7 percent in the five days ended Oct. 19.

``The currency market is closely following which way stocks are moving,'' said Rohan Lasrado, a trader at HDFC Bank Ltd. in Mumbai. ``The way stocks have held higher after all the news flow gives an indication we are unlikely to see drastic curbs on fund flows.''

The rupee climbed 0.1 percent to 39.535 at the 5 p.m. close of trading in Mumbai, according to data compiled by Bloomberg.

Overseas investors buying shares anonymously, using derivatives known as participatory notes, would have 18 months to switch to investing directly in the market, the Securities & Exchange Board said Oct. 16. More than half the net purchases of Indian stocks this year may have been through the use of participatory notes, according to JPMorgan Chase & Co.

The proposals triggered a plunge in stocks the day after they were released, halting trading for an hour.

Record equity purchases amounting to a net $16.6 billion by global funds this year fueled a 12 percent rally in the rupee and pushed the Bombay Stock Exchange Sensitive Index, or Sensex, to an all-time high of Oct. 18, Bloomberg data show.

Stock-Market `Bubble'

Capital flows have caused a ``bubble'' in the stock market and pushed the rupee to a 9 1/2-year high, Chidambaram said yesterday.

Offshore derivatives, known as participatory notes, rose 11-fold to 3.54 trillion rupees ($89 billion) in 3 1/2 years, the regulator said on Oct. 16. These accounted for 52 percent of foreign brokers' assets under custody, the regulator added.

``The currency market mood will be rather cautious today as traders await statements from the SEBI,'' said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. ``The rupee may halt gains until the SEBI releases the details of the proposed investment restrictions.''

To contact the reporters on this story: Sam Nagarajan in New Delhi at samnagarajan@bloomberg.net; Anil Varma in Mumbai at avarma3@bloomberg.net.

Last Updated: October 25, 2007 07:33 EDT