Rupee Rebounds After Debt Holding Limit for Foreigners Raised

India’s rupee rebounded, erasing the day’s losses, after the nation boosted a limit on foreign investments in local-currency debt.

The regulatory ceiling on holdings was increased by $10 billion to $75 billion, according to a statement on the central bank’s website. The ownership cap for government notes was raised by $5 billion to $25 billion and that for company notes to $50 billion from $45 billion. The Reserve Bank of India will cut interest rates next week for the first time since April to help revive economic growth, a Bloomberg survey showed.

“Inflows will definitely increase,” said Ashtosh Raina, head of foreign-exchange trading at HDFC Bank Ltd. in Mumbai. “This is a very good step ahead of the central bank’s policy review, and should give it room to cut rates.”

The rupee was little changed at 53.6850 per dollar in Mumbai, having dropped as much as 0.4 percent earlier, according to data compiled by Bloomberg. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell 10 basis points, or 0.10 percentage point, to 9.85 percent today, taking this week’s decline to 30 basis points.

International investments in bonds rose 27 percent since the end of 2011, touching a record $33.3 billion on Jan. 3, exchange data show.

The yield on the 8.15 percent government bonds maturing in June 2022 rose one basis point to 7.88 percent, according to the central bank’s trading system. The notes pay 608 basis points more than similar-maturity U.S. Treasuries. Local bond and currency markets are shut tomorrow for a holiday.

Rate Outlook

The rupee declined earlier after the International Monetary Fund predicted yesterday that the world economy will expand 3.5 percent this year, less than the 3.6 percent forecast in October. The Washington-based lender scaled back its 2013 estimate for India to 5.9 percent from 6 percent.

India’s Finance Minister Palaniappan Chidambaram plans to stick to a budget-deficit target of 4.8 percent of gross domestic product in the year through March 2014, he said in an interview on Jan. 22, adding that he’d like interest rates to moderate to revive economic growth. The Reserve Bank of India will lower its benchmark repurchase rate by 25 basis points to 7.75 percent at a Jan. 29 review, according to 22 of 26 analysts in a Bloomberg survey. Two predict a cut to 7.5 percent and one sees no change.

Three-month onshore rupee forwards traded at 54.75 per dollar, compared with 54.64 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were unchanged at 54.46. 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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