India’s Rupee Advances on Optimism Fed Policy Will Spur Inflows

India’s rupee rose on speculation U.S. policy makers this week will maintain economic stimulus measures that have spurred fund flows into emerging markets.

The Federal Reserve will start a two-day policy meeting tomorrow after a government report last week showed the world’s largest economy expanded less than analysts forecast. The Reserve Bank of India will lower its repurchase rate to 7.25 percent from 7.5 percent at a May 3 review, according to 22 of 26 economists in a Bloomberg survey. Three see no change and one predicts a cut to 7 percent. Global funds bought a net $11 billion of Indian stocks this year, exchange data show.

“Bad U.S. data means that the Fed will probably stay accommodative for longer and continue with its bond purchases,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore.

The rupee advanced 0.2 percent to 54.2450 per dollar in Mumbai, 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, rose three basis points, or 0.03 percentage point, to 8.17 percent.

The rupee’s gains will be limited on concern Finance Minister Palaniappan Chidambaram will struggle to pass bills allowing more foreign investment due to lawmaker disagreements, according to Westpac.

Political Hurdles

Parliament was adjourned on April 26 for a fourth day amid protests after India’s federal investigation agency said government officials vetted its report on alleged graft in the allocation of coal mines. This raises hurdles to passing laws permitting more foreign investment in industries including insurance, and damps confidence in the rupee, said Cavenagh.

“The rupee will stay rangebound in the near term as investors will be watching how the political scene unfolds,” he said.

Larsen & Toubro Ltd., India’s biggest engineering company, is positioning for the rupee to stay between 53 and 56 or 57 a dollar in the next six months, Chief Financial Officer R. Shankar Raman said in an interview in Mumbai today. The currency has a bias toward weakening until the record current-account deficit improves, he said.

Three-month onshore rupee forwards traded at 55.21 per dollar, compared with 55.38 on April 26, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.02 versus 55.19. 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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