Rupee Advances on Speculation Fund Inflows Will Offset Widening Trade Gap

India’s 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 Bombay Stock Exchange’s Sensitive Index to a 2 1/2 year-high on Aug. 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 yesterday 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 Plc.

The rupee appreciated 0.2 percent to 46.72 per dollar as of the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. It gained 0.6 percent yesterday, the most in more than two months. The median forecast of 19 analysts surveyed by Bloomberg News is for the currency to rise to 45.5 by the end of the year.

Funds based abroad raised total holdings of Indian equities to a record $85.7 billion on Aug. 31, data from the Securities and Exchange Board of India show. Investments in local debt touched an all-time high $16 billion on Aug. 24.

India’s current-account deficit, which includes inflows from software companies and remittances by Indians living overseas, 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 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

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