Rupee Pares Weekly Advance as India’s Stock Rally Loses Steam

  • HSBC raises end-2016 currency forecast to 66 a dollar from 69
  • Bond yields drop to seven-year lows amid RBI’s cash infusion

India’s rupee dropped Friday, paring its weekly advance, as a selloff in local shares led to speculation foreign purchases of equities will slow.

The S&P BSE Sensex slipped 0.9 percent, the most in a month, as some investors judged the stock gauge’s advance to an 18-month high as overdone. Demand for developing-nation assets has picked up after weak U.S. jobs data reduced the odds of an increase in interest rates by the Federal Reserve. This week also marked the beginning of Urjit Patel’s term as the Reserve Bank of India’s governor, with sovereign notes climbing as the central bank injected cash into the financial system by adding to its debt purchases.

“A sharp decline in local stocks and dollar-buying by oil companies weighed on the rupee,” said Arnab Sardar, a currency trader at Dhanlaxmi Bank Ltd. in Mumbai. “The strong equity gains seen in the last few sessions led some investors to book profits.”

Overseas funds bought a net $360 million of shares since Sept. 2, set for the biggest weekly inflows since the period ended Aug. 12. Local markets were shut Monday for a public holiday. Global holdings of rupee-denominated government and corporate bonds climbed 27.5 billion rupees ($412 million) in the week through Thursday, the most since the five days ended July 15.

The rupee strengthened 0.2 percent from Sept. 2 to 66.6775 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It climbed to 66.3275 on Wednesday, the strongest level since May 3. The currency declined 0.4 percent on Friday and is still Asia’s second worst-performer this year after China’s yuan, having weakened 0.8 percent.

HSBC Holdings Plc raised its year-end forecast the Indian currency to 66 per dollar from an estimate of 69 earlier, according to a report received on Friday. Relatively low volatility, attractive yields and improving fundamentals make the rupee appear as one of the most attractive carry currencies on risk-adjusted basis, HSBC analysts including Paul Mackel wrote in the note.

“Flows have been good, the U.S. dollar is weak, and both these factors augur well for the rupee,” said Gaurav Sharma, a senior currency analyst at Religare Commodities Ltd. in Noida, near New Delhi. “Odds of a December U.S. rate hike too are looking weak.”

India’s central bank bought 100 billion rupees of sovereign notes via its open-market operations on Thursday, taking such purchases in the year that started April 1 to over a trillion rupees. The government met its target to sell 140 billion rupees of bonds at Friday’s weekly auction.

The yield on notes due January 2026 dropped six basis points this week to 7.06 percent, according to the prices from the central bank’s trading system. Its close of 7.04 percent on Thursday was the lowest for a benchmark 10-year security since August 2009. The yield on the new 10-year debt issued last week plunged 13 basis points to 6.83 percent.

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