Indian Rupee Gains Most in Three Weeks on Foreign Fund Inflows

India’s rupee strengthened the most in more than three weeks on speculation more monetary stimulus in developed economies will boost inflows to higher-yielding emerging markets.

Global funds have pumped $8.2 billion into Indian stocks this year and their holdings of the nation’s debt rose to a record $33.8 billion on Feb. 21, exchange data show. Japanese Prime Minister Shinzo Abe is very likely to nominate Haruhiko Kuroda as central bank governor, according to a government official with knowledge of the matter, who asked not to be named as the talks are private. Kuroda said Feb. 11 the Bank of Japan has “really substantial room” for further easing.

“India has seen inflows largely because of global liquidity,” said Paresh Nayar, head of money markets and currency trading at FirstRand Ltd. in Mumbai. “The flows are likely to continue for some time, as any withdrawal of stimulus would mean policy makers have utmost confidence in the recovery.”

The rupee advanced 0.6 percent, the most since Jan. 30, to 53.8750 per dollar in Mumbai, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 10 basis points, or 0.10 percentage point, to 9.40 percent.

India’s 10-year government bonds yield a premium of 583 basis points over similar maturity U.S. Treasuries.

Austere Budget

Federal Reserve Chairman Ben S. Bernanke is scheduled to testify before lawmakers tomorrow and the next day, and is likely to describe asset purchases as an important tool to improve the U.S. economy, Jefferies & Co. analysts, including Ward McCarthy in New York, wrote in a Feb. 22 research report.

BNP Paribas SA and Nomura Holdings Plc set up trades to buy the rupee last week, saying they expect an “austere” annual budget to be unveiled by Finance Minister Palaniappan Chidambaram on Feb. 28.

The minister will seek to narrow the budget deficit to 4.8 percent of gross domestic product in the year starting April, from this year’s goal of 5.3 percent, according to a Bloomberg survey of analysts and investors.

Three-month onshore rupee forwards traded at 54.99 per dollar, compared with 55.39 on Feb. 22, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.82 versus 55.17. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.