Rupee Completes Biggest Weekly Gain Since May on Budget Optimism

India’s rupee completed its biggest weekly gain in almost two months on optimism the government will unveil measures to revive the economy in its budget on July 10.

Foreign investors have pumped more than $20 billion into local stocks and bonds this year, the biggest inflow in Asia, exchange data show. The rupee has become more attractive after India curbed its current-account deficit and inflation and on bets Prime Minister Narendra Modi’s administration will act to spur growth, according to Schroder Investment Management Ltd.

“Expectation of a growth-friendly budget is driving the rupee,” said Gaurav Sharma, a senior currency analyst at Religare Commodities Ltd. in Noida, outside New Delhi. “Markets will continue to trade higher if the government continues with is reforms agenda.”

India’s currency rose 0.6 percent this past week to 59.735 per dollar at the close in Mumbai, according to prices compiled by Bloomberg. That’s the biggest gain since the period ended May 16. The currency was little changed today.

Finance Minister Arun Jaitley said July 1 the government would take bold decisions and pursue a path of fiscal prudence to boost the economy. Over the past month, the government has increased fuel prices and train fares, steps that will bolster its revenue and help curb spending on energy subsidies.

India’s economy grew 4.7 percent in the year through March, compared with a 4.5 percent pace in the year before that was the lowest in a decade, according to official data.

Carry Trade

The rupee is leading carry-trade returns in Asia as expectations for the narrowest swings in three years reduce the risk of investing in the region’s highest investment-grade yields. Investors borrowing dollars to purchase rupee fixed-income assets have earned 8.2 percent in 2014, beating the 6.7 percent on the Indonesian rupiah and the 5.1 percent on South Korea’s won, data compiled by Bloomberg show.

The Indian currency’s one-year implied volatility slumped 422 basis points this year to 9.12 percent on June 27, the least since June 2011. It was little changed this week at 9.23 percent.

“The rupee story has been a combination of carry, monetary-policy credibility and the more recent political news,” Rajeev De Mello, who manages $10 billion as the head of Asian fixed income at Schroder Investment, said by phone from Singapore on July 2. “The Reserve Bank of India has done a tremendous job in targeting inflation. In this environment when the volatility is low, investors tend to favor carry more.”

Three-month offshore non-deliverable forwards on the rupee rose 0.8 percent this past week and were little changed at 60.475 per dollar, according to data compiled by Bloomberg. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in the greenback.

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