Rupee Gains Most in Three Weeks as Indian Economy Set to Rebound

India’s rupee rallied the most in more than three weeks on optimism slowing inflation and prospects of an economic revival will attract capital inflows.

The currency rebounded from a one-month low as Brown Brothers Harriman & Co. said investors should consider purchasing the rupee as India’s economic fundamentals are improving. Inflation slowed to a three-year low of 6.62 percent in January and the Reserve Bank of India cut interest rates last month for the first time since April.

The currency rose 0.5 percent today to 54.1850 per dollar in Mumbai, after touching 54.6300 yesterday, the weakest level since Jan. 17, according to data compiled by Bloomberg. The Dollar Index, which tracks the greenback against six major trading partners, retreated from a five-month high touched yesterday.

The rupee slumped the most in six weeks yesterday after minutes from the Federal Reserve’s last meeting issued Feb. 20 showed several officials prefer varying the pace of buying bonds, raising concerns fund inflows into emerging markets will slow.

“Markets overreacted to the minutes and should reassess that view in the coming days,” analysts at BBH, including New York-based Marc Chandler, wrote in an e-mail to clients today. “The RBI is easing, inflation is starting to fall, growth should start to pick up and so the rupee should strengthen back toward 53.”

The rupee’s one-month implied volatility, a gauge of expected moves in the exchange rate used to price options, rose 45 basis points, or 0.45 percentage point, to 9.50 percent this week. The rate climbed 10 basis points today.

Three-month onshore rupee forwards traded at 55.39 per dollar, compared with 55.60 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.17 versus 55.52. 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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