Indian Rupee Gains as Rules for Foreign Investment in Debt Eased

India’s rupee advanced for the third time this week on optimism capital inflows will increase as policy makers ease rules for overseas ownership of local debt.

The currency rebounded from the lowest level in more than a week as the central bank cut the minimum holding period for foreign buyers of the nation’s infrastructure bonds to a year from three years. The government may lift a $10 billion cap on international investment in the nation’s sovereign debt, a finance ministry official said last month, asking not to be identified before a public announcement.

“There is a rumor the government may raise the cap on foreign investment in sovereign debt,” said Vikas Babu, a currency trader in Mumbai at Andhra Bank. “This would be positive for inflows, especially if risk appetite returns.”

The rupee advanced 0.1 percent to 49.1375 per dollar in Mumbai, according to data compiled by Bloomberg. It fell as low as 49.5625 earlier, the weakest level since Oct. 25.

Overseas funds added $254 million to holdings of Indian debt this week, exchange data show, as the extra yield on 10-year sovereign notes over U.S. Treasuries touched a 12-year high of 6.95 percentage points on Nov. 1.

The rupee’s advance was also supported by reports of a split in the Greek government, making a proposed referendum on its bailout less likely and aiding efforts to contain Europe’s debt crisis. Four Greek ministers were meeting separately on developments in the country, state-run NET TV reported without saying how it got the information. Greek Prime Minister George Papandreou may withdraw his proposal for a referendum, said an official with the ruling Pasok party who declined to be named.

Offshore forwards indicate the rupee will trade at 50.03 to the dollar in three months, compared with expectations for a rate of 49.99 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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