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Rupee Rebounds on Optimism Yield Advantage Will Attract Inflows

India’s rupee rose, erasing earlier losses, on speculation the yield advantage on local assets will attract global capital as advanced nations keep interest rates low to revive economic growth.

The European Central Bank will keep its benchmark rate at a record low today, a Bloomberg News survey showed. Euro-based investors will earn 10.9 percent including interest, the most in Asia, by holding rupees until the end of this year, based on currency forecasts and deposit rates compiled by Bloomberg. Ten-year government bonds pay 7.86 percent in India, compared with 1.92 percent in the U.S. and 1.44 percent in Germany.

“With potentially sticky exchange rates, the best way to make money could be to focus on the carry,” analysts at Credit Agricole CIB, including Paris-based Sebastien Barbe, wrote in a report today, referring to the practice of borrowing in a low-yield currency to invest in one with a higher interest rate. “We maintain our view that the rupee will be the best performing Asian currency this year.”

The rupee advanced 0.3 percent to 54.5650 per dollar in Mumbai, according to data compiled by Bloomberg. It fell as much as 0.4 percent earlier. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, dropped 35 basis points, or 0.35 percentage point, to 9.31 percent.

Three-month onshore rupee forwards traded at 55.66 per dollar, compared with 55.86 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.57 versus 55.86. 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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