Rupee Rises to Three-Month High on Optimism Inflows Will Climb

India’s rupee rose to the highest level since October on optimism the first interest-rate cut by the central bank in nine months will spur economic growth, attracting investors.

The Reserve Bank of India lowered its benchmark repurchase rate to 7.75 percent from 8 percent yesterday, and said cooling inflation will give some room to ease monetary policy further. Global funds poured $4 billion into local bonds and stocks this month through Jan. 28, boosting debt holdings to an all-time high of $33.5 billion, exchange data show. The government’s 10-year bonds yield 7.89 percent, while similar-maturity U.S. Treasuries pay 2 percent.

“We expect gradually ebbing inflationary pressures to facilitate further rate cuts in coming months, which are likely to promote greater economic growth and foreign inflows,” analysts at Barclays, including Singapore-based Nick Verdi, wrote in a report received today. “Emerging-market currencies that offer carry, such as the rupee, remain attractive against the backdrop of still-ample global liquidity.”

The rupee advanced 0.9 percent to 53.3050 per dollar in Mumbai, according to data compiled by Bloomberg. It touched 53.2750 earlier, the strongest level since Oct. 18. The currency has risen 3.2 percent this month. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell five basis points, or 0.05 percentage point, to 9.75 percent.

Pimco’s Perspective

The Reserve Bank lowered its inflation forecast for March, the final month of the current fiscal year, to 6.8 percent from 7.5 percent. The benchmark wholesale-price index rose 7.18 percent in December from a year earlier, the slowest pace in three years, government data show. The monetary authority also said it will consider India’s fiscal deficit and record current-account shortfall while deciding policy.

“India still has the challenges of the twin deficits and the challenge of balancing growth and inflation objectives, but the trend is positive on fundamentals and policy front,” said Ramin Toloui, global co-head of emerging markets portfolio management in Singapore at Pacific Investment Management Co., which oversees the world’s largest bond fund. “When you combine that trend with the valuation, that constitutes a strong rationale for a long position in the currency.”

Three-month onshore rupee forwards traded at 54.41 per dollar, compared with 54.74 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.14 versus 54.57. 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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