Indian Rupee Gains Most in Two Weeks as Debt Tax Cut; Bonds Rise

India’s rupee rose the most in two weeks, completing a second monthly gain, as the government reduced a levy on overseas investments in local bonds to encourage capital inflows. Government bonds advanced.

The so-called withholding tax, charged on interest income earned by foreigners on rupee-denominated debt, will be reduced to 5 percent from 20 percent, Finance Minister Palaniappan Chidambaram said in parliament today. The move will boost inflows into the nation’s debt market, according to Vikas Babu, a foreign-exchange trader at state-owned Andhra Bank.

“Dollar inflows will increase and become smoother, which is why the rupee advanced,” Mumbai-based Babu said. “The measures complement efforts to improve India’s economic fundamentals.”

The rupee climbed 0.8 percent today to 53.81 per dollar in Mumbai, the biggest advance since April 16 and the most in Asia today, according to data compiled by Bloomberg. It touched 53.79, the strongest since April 17. The currency appreciated 0.9 percent in April, the best performance since January.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 14 basis points, or 0.14 percentage point, to 8.31 percent today. Indian markets will be shut tomorrow for a local holiday.

Global funds bought a net $11 billion of Indian stocks and $2.9 billion of rupee-denominated debt this year, exchange data show. Ten-year sovereign bonds in India offer a yield premium of 609 basis points over similar-maturity U.S. Treasuries.

Stimulus Optimism

The rupee climbed for a second day on speculation global central banks will extend economic stimulus measures that have spurred capital flows into emerging markets.

The Federal Reserve begins a two-day policy meeting today after a government report last week showed the U.S. economy expanded less than analysts forecast. Most economists in a Bloomberg survey predict the European Central Bank will cut interest rates this week. 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 28 of 34 economists in a Bloomberg survey. Five see no change and one predicts a cut to 7 percent.

“The RBI’s policy should be growth-supportive and positive for the rupee,” said Ashtosh Raina, head of foreign-exchange trading at HDFC Bank Ltd., India’s largest lender by market capitalization. “Global liquidity has a large role to play in the currency’s appreciation.”

Hindustan Unilever

The rupee also strengthened today after Unilever Plc, the world’s second-largest consumer goods company, said it will spend up to 292.2 billion rupees ($5.4 billion) to boost its stake in its Indian unit. Unilever will pay 600 rupees a share in an open offer to raise its stake in Hindustan Unilever Ltd. to 75 percent from the current 52.48 percent, it said in a statement today.

The local foreign-exchange market would “easily” absorb fund inflows related to the stake purchase, HDFC’s Raina said.

Three-month onshore rupee forwards traded at 54.84 per dollar, compared with 55.21 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.54 versus 55.02. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Government bonds advanced. The yield on the 8.15 percent notes due June 2022 fell three basis points to 7.73 percent in Mumbai, according to data compiled by Bloomberg. It reached 7.71 percent today, the lowest level for a benchmark 10-year note since July 2010. The rate declined 23 basis points this month as official data on April 15 showed wholesale prices rose 5.96 percent in March, the least since November 2009.

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