India’s Rupee Rebounds as Improving Economy Seen Luring Inflows

India’s rupee rebounded from its biggest drop since January on optimism a recovering economy will lure inflows even as the U.S. keeps cutting stimulus.

Inflation in Asia’s third-largest economy is easing and industrial production is picking up, reports showed this month, while India is less exposed than many other Asian countries to a slowdown in China. The Federal Reserve will end its bond-buying program before the end of the year with an interest-rate increase likely to follow in “around six months,” Chair Janet Yellen said March 19. Foreign funds have pumped $3 billion into Indian stocks and bonds this month.

“India is seeing inflows as inflation goes down and boosts real yields,” said Jonathan Cavenagh, a strategist at Westpac Banking Corp. in Singapore. “There is also strong optimism before the elections and all of that provides a good flow backdrop.”

The rupee rose 0.7 percent today to 60.9250 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It fell 0.6 percent yesterday, the biggest drop since Jan. 27. Investors are betting that elections due to start next month will result in a stable and decisive coalition, Westpac’s Cavenagh said.

Global funds bought a net $1.1 billion of Indian stocks this month and $1.6 billion of rupee-denominated debt, exchange data show. Consumer price-inflation eased to a two-year low in February, wholesale-price gains slowed to the least in nine months, and industrial production rose 0.1 percent in January after a contraction the previous month, official reports show.

China Slowdown

Chinese industries including retail and mining showed weaker revenue growth, while loans through non-traditional channels became more expensive, according to the China Beige Book survey, released today by New York-based CBB International.

India exported $42 billion of goods to the U.S. in 2012, compared with $19 billion to China, official data compiled by Bloomberg show. China was the top market for South Korea, Malaysia and Taiwan. The rupee has climbed 0.4 percent this week, leading gains in Asia as the won, ringgit and Taiwan dollar have depreciated.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 17 basis points, or 0.17 percentage point, today to 9.16 percent. The gauge advanced 88 basis points this week.

The rupee’s three-month offshore non-deliverable forwards strengthened 0.6 percent to 62.14 per dollar. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Before it's here, it's on the Bloomberg Terminal.