Indian Rupee Gains on Pledge to Deepen Economic-Policy Overhaul

India’s rupee rose, approaching a three-month high, after Finance Minister Palaniappan Chidambaram said prudence will be a key theme in next month’s budget and pledged to deepen an economic-policy overhaul.

The government raised the tariff on gold, India’s second-biggest import, to 6 percent from 4 percent on Jan. 21 to help reduce a record current-account shortfall. Chidambaram said in an interview yesterday he plans to stick to a budget-deficit target of 4.8 percent of gross domestic product in the year through March 2014, adding that he’d like interest rates to moderate to revive economic growth.

“India’s reform story gained momentum via increased taxes on gold imports,” analysts at Morgan Stanley, including Rashique Rahman, wrote in a research report received today. Inflows into local-currency bonds will increase and support the rupee, they wrote.

The currency advanced 0.3 percent to 53.6750 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 53.3800 yesterday, the strongest level since Oct. 23. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell 35 basis points, or 0.35 percentage point, to 9.95 percent.

Bond Purchases

The capital-market regulator met its target to sell 176.61 billion rupees ($3.3 billion) of permits that allow global funds to purchase government debt on Jan. 21, according to two people familiar with the matter, who asked not to be identified because they aren’t permitted to speak to the media. Foreign investor holdings of rupee-denominated securities rose to a record $33.3 billion this month, stock exchange data show.

India’s central bank will lower its benchmark repurchase rate by 25 basis points to 7.75 percent at a Jan. 29 review, according to 15 of 18 analysts in a Bloomberg survey. Two predict a cut to 7.50 percent and one sees no change.

The rupee’s gains will be limited by demand for dollars from importers, according to Yes Bank Ltd. The Reserve Bank of India eased rules for exporters yesterday to purchase dollars.

Three-month onshore rupee forwards traded at 54.64 per dollar, compared with 54.79 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.46 versus 54.60. 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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