Rupee Rises Most in Week on Optimism U.S. Data Will Spur Inflows

India’s rupee rose the most in a week on optimism an improvement in the U.S. services industry, which drove stocks in the world’s largest economy to a record high, will spur inflows to emerging markets.

The Institute for Supply Management’s non-manufacturing index, which covers about 90 percent of the U.S. economy, increased to 56 last month, the highest level since February 2012. The rally in the Dow Jones Industrial Average erased losses from the financial crisis, promoting gains in stocks across Asia. The rupee’s advance will be limited because last week’s budget doesn’t include a cut in expenditure, according to Bloomberg economist Tamara Henderson.

“The best hope for the rupee would seem to rest with global risk appetite, whereby a rising tide of global investor bullishness would lift India’s ‘boat’ alongside other investment destinations,” Singapore-based Henderson wrote in a report today. “Without a sustained commitment to expenditure restraint, the rupee will likely languish relative to its peers.”

The currency climbed 0.4 percent to 54.7200 per dollar in Mumbai, the biggest gain since Feb. 27, according to data compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell eight basis points, or 0.08 percentage point, to 9.64 percent.

The S&P BSE Sensex Index rose for a second day. It fell 1.5 percent on Feb. 28, along with a 1 percent decline in the rupee, the day the budget was announced.

India Budget

India’s budget projected a 16.4 percent increase in total spending and a 23.4 percent jump in targeted receipts excluding borrowings. The revenue cushion relies on temporary tax hikes and is insufficient to reduce the deficit in rupee terms because expenditures are almost 50 percent larger than revenues, Henderson wrote.

The nation’s service industries expanded at a slower pace in February, HSBC Holdings Plc and Markit Economics said in a statement yesterday, as the weakest economic growth in a decade capped demand. The purchasing managers’ index fell to 54.2 from 57.5 in January.

Three-month onshore rupee forwards traded at 55.86 per dollar, compared with 55.89 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.76 versus 55.94. 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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