Sept. 28 (Bloomberg) -- India's rupee is heading for the biggest monthly advance since April on speculation the nation's economic growth and rallying stock market will attract increased investment from abroad.

The currency was set to gain for a fifth quarter as the benchmark share index rallied to a record for the eighth straight day. The rupee also advanced on speculation investors will exchange the dollar for higher-yielding emerging-market currencies after the U.S. Federal Reserve cut interest rates this month.

``We expect rupee appreciation to continue as capital inflows remain strong,'' Yeo Han Sia, currency strategist at Bank of America Corp. said in Singapore. ``There are greater flows into regional markets after the Fed rate cut. The strong response to ICICI Bank's dollar bond this week shows investors remain confident about Asia, particularly India.''

The rupee gained 2.8 percent to 39.7225 per dollar as of 3:03 p.m. in Mumbai, according to data compiled by Bloomberg. The currency rose as high as 39.62, the strongest since April 1998, on Sept. 26. Its 11.4 percent gain this year is the second-highest among 18 Asia-Pacific currencies tracked by Bloomberg. The Australian dollar has climbed 11.7 percent.

The rupee may rise to 39 by the end of the year, Yeo said.

The Bombay Stock Exchange's Sensitive Index, or Sensex, rose as high as a record 17,361.47 today. Overseas investors bought shares worth $246 million more than they sold on Sept. 26, taking their net purchases this year to a record $11.6 billion, according to the Securities and Exchange Board of India.

ICICI Bank Ltd., India's biggest bank by market value, received orders worth more than three times the $2 billion of five-year bonds it offered to international investors this week. The bonds rose in the secondary market yesterday, indicating increased demand, according to Merrill Lynch & Co.

Raising Forecasts

The rupee's accelerated gains prompted at least three banks to raise their forecasts for the currency this week. JPMorgan Chase & Co. said today the rupee will rise to 39.5 by the year- end, reversing by almost 6 percent an earlier call for the currency to decline.

Standard Chartered Plc this week raised its end-2007 rupee forecast to 39.50 from an earlier call for the currency to decline to 41.80. UBS AG, Europe's largest bank by assets, raised its three-month forecast, predicting the currency will rise to a decade-high 38 per dollar.

The Indian currency also gained as lower U.S. interest rates spurred demand for higher-yielding currencies, David Mann, Hong Kong-based senior strategist at Standard Chartered, said on Sept. 25. The Federal Reserve reduced its benchmark rate last week for the first time since 2003.

The Reserve Bank's 7.75 percent overnight rate is 3 percentage points higher than the Fed's after the U.S. central bank cut its key rate by half percentage point on Sept. 18.

`Month-End Payments'

The rupee pared gains today on speculation companies took advantage of a rally in the currency to buy dollars needed to pay for shipments from abroad. Gains in the local currency reduce the cost of shipments from abroad.

``The dollar is in demand today,'' said L.V. Prasad, chief currency trader at IndusInd Bank Ltd. in Mumbai. ``Importers may be covering month-end payments following the rupee's appreciation.''

Indian companies are increasing dollar purchases as the nation's imports grow faster than exports, causing a wider trade deficit. The nation's average monthly trade shortfall was $6.4 billion in the four months through July, up 62 percent from the year-ago period, government data show.

Refiners such as Indian Oil Corp. may have increased dollar purchases to pay for costlier oil imports after the commodity nearly rose to a record. Crude oil in New York gained 29 percent in the past six months. It was at $82.75 a barrel at 10:40 a.m. in London.

Current Account Shortfall

India's current account deficit widened less than expected last quarter to $4.69 billion on higher remittances and as Tata Consultancy Services Ltd. and other software makers earned more from overseas clients, the central bank said today. Analysts expected a $5.7 billion deficit.

The rupee also gained this month as India's economic growth attracted increased long-term investments from overseas, said Krishnamurthy Harihar, head of treasury at Mumbai-based Development Credit Bank Ltd.

``Private equity and foreign direct investments have become an important support for the rupee,'' he said.

Monthly inflows of direct investment averaged $1.19 billion in the first four months of this year, up from $628 million in the year-ago period, according to government data. Asia's fourth-largest economy grew 9.3 percent in the three months through June, accelerating from the previous quarter.

India received private equity investments totaling $10.8 billion in the first seven months of 2007, compared with $7.86 billion in the whole of 2006, the Economic Times reported Sept. 17, citing Grant Thornton LLP, a U.S.-based accounting firm.

The rupee may rise to 39.5 in two weeks, Harihar said.

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

Last Updated: September 28, 2007 06:19 EDT