India Rupee Rallies Most in Two Years as Bonds Gain on Rate Bets

  • Fed's decision to hold rates provides risk-on sentiment: RBL
  • Sovereign bonds gain as DBS, Kotak Securities see India easing

India’s rupee climbed the most since September 2013 on speculation demand for the nation’s assets will pick up after the Federal Reserve refrained from raising interest rates.

Ten-year sovereign bonds completed their biggest advance since Aug. 25 as economists at DBS Bank Ltd. and Kotak Securities Ltd. said the Fed’s decision paves way for the Reserve Bank of India to cut borrowing costs for a fourth time this year. An emerging-market selloff sparked by last month’s shock devaluation of the Chinese yuan and bets the U.S. central bank would tighten policy at its Sept. 16-17 meeting saw global funds dump a net $3 billion of Indian shares since end-July, data compiled by Bloomberg show.

The rupee climbed 1.2 percent to 65.6750 a dollar in Mumbai Friday, the strongest level since Aug. 20, according to prices from local banks compiled by Bloomberg. Friday’s rally took the currency’s weekly advance to 1.3 percent, the most since January.

“The Fed outcome has provided risk-on sentiment for local equities and the rupee,” said Rohan Lasrado, Mumbai-based head of foreign-exchange trading at RBL Bank Ltd. “It clearly shows that the Fed is also watching other markets before taking a decision on its policy.”

The S&P BSE Sensex climbed to a three-week high Friday.

Officials are watching developments in China and emerging markets, Fed Chair Janet Yellen said Thursday as she heeded calls from the World Bank and International Monetary Fund to avoid destabilizing global markets with the first U.S. rate increase in almost a decade. Higher U.S. rates reduce the allure of emerging-market assets.

Bonds Gain

The yield on Indian government notes due May 2025 dropped six basis points to 7.70 percent, according to prices from the central bank’s trading system, taking its decline for the week to seven basis points, the most since the period ended June 19.

India’s two main inflation gauges showed continued easing, according to separate reports this past Monday, creating room for RBI Governor Raghuram Rajan to cut the benchmark repurchase rate that he has already reduced by 75 basis points this year. The central bank next reviews policy on Sept. 29.

Consumer price inflation, the monetary authority’s benchmark, eased to 3.66 percent in August from a revised 3.69 percent -- below the RBI’s target of 6 percent by January for a 12th straight month. Wholesale prices fell 4.95 percent last month from a year earlier.

“With a temporary global relief rally expected post the more dovish-than-expected Fed policy, the RBI’s focus will revert to domestic factors,” Kotak Securities’ economists wrote in a report. “We continue to see CPI inflation undershooting the RBI’s 6 percent objective by about 50 basis points in January 2016. This, in conjunction with a dovish Fed, should pave the way for a 25 basis point repo-rate cut at the upcoming RBI meeting.”

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