Rupee Rises to Two-Week High on Inflow Optimism Before Elections

India’s rupee advanced to the strongest level in almost two weeks and government bonds advanced on optimism easing inflation and the prospect of a growth-galvanizing new government will attract inflows.

Global funds pumped $2.9 billion into Indian stocks and bonds this month, helping push the S&P BSE Sensex index of shares to a record high today before a central bank interest-rate review on April 1 and elections set to start April 7. The possibility that price pressures may resurface, keeping borrowing costs high and consumer spending subdued, is the key risk to the rally, according to DBS Bank Ltd.

The rupee rose 0.2 percent to close at 60.7875 per dollar in Mumbai, prices from local banks compiled by Bloomberg show. It touched 60.6450 in intraday trading, the strongest level since March 11. The yield on the 8.83 percent sovereign bonds due November 2023 fell one basis point to 8.78 percent, according to the central bank’s trading system.

“The new government’s economic priorities will set the economy on course for a gradual recovery,” Radhika Rao, an economist at DBS in Singapore, wrote in a research note today. “The most favored outcome for the financial markets will be a decisive majority, possibly led by the opposition party, according to the various private opinion polls.”

Economic concerns have put the ruling Congress party behind the Bharatiya Janata Party in public opinion surveys. Narendra Modi, the BJP’s prime ministerial candidate, is campaigning on the basis of his 13-year role as chief minister of Gujarat, a state that has outpaced the national economic growth rate for the last six fiscal years.

Easing Inflation

The Reserve Bank of India will keep its benchmark repurchase rate at 8 percent next week, according to 17 of 18 economists in a Bloomberg survey. One sees an increase to 8.25 percent. Consumer price-inflation eased to a two-year low in February and wholesale prices rose by the least in nine months, official reports showed this month.

India’s consumer-price gains are still the fastest in Asia, while gross domestic product is projected to grow 4.9 percent in the year through March 31, near the previous period’s 4.5 percent that was the slowest since 2003.

The government bought back 50 billion rupees ($824 million) of notes as planned at an auction today, the RBI said in an e-mailed statement.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, was unchanged from March 21 at 9.23 percent.

Three-month offshore non-deliverable forwards strengthened 0.4 percent to 61.91 per dollar. 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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