India Rupee Snaps Two-Day Loss on Speculation of Rate Increase

India’s rupee snapped a two-day fall on speculation the central bank will raise interest rates this month to calm price pressures in Asia’s third-biggest economy, helping draw funds from overseas investors.

The Reserve Bank of India increased its benchmark rates by 150 basis points in 2010, the most of any monetary authority in Asia, to curb inflation. The repurchase rate, the rate at which lenders borrow from the central bank will be increased by 25 basis points to 6.5 percent at a Jan. 25 review, according to 11 of 16 economists in a Bloomberg News survey on Dec. 15. Foreigners bought a record $29.3 billion of local shares last year.

“A rate hike is definitely likely as inflation numbers are high,” said Sudarshan Bhatt, Mumbai-based chief currency trader at Corporation Bank. “Such an increase will lead to the rupee’s appreciation.”

The Indian currency rose 0.2 percent to 45.2625 per dollar as of the 5 p.m. close in Mumbai, compared with 45.3300 yesterday, according to data compiled by Bloomberg. It earlier dropped to 45.4225, the weakest level since Dec. 29.

Food inflation surged to 18.32 percent in the week ended Dec. 25 from a year earlier, the highest since July, according to a commerce ministry statement today. India’s food inflation rate is an “area of concern,” Finance Minister Pranab Mukherjee said in New Delhi today.

Offshore forwards indicate the rupee will trade at 45.96 to the dollar in three months, compared with expectations of 45.99 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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