Rupee Rises to Three-Week High as Yields Shine on Fed Pullback

  • Reserve Bank of India expected to keep rates on hold Tuesday
  • Pimco, Aberdeen favor local assets on attractive carry, yields

India’s rupee rose to its strongest in almost three weeks on optimism investors will be lured to bond yields that are among the highest in Asia as speculation builds that the U.S. will delay raising interest rates after jobs growth weakened.

The currency climbed for a third day before the Reserve Bank of India’s meeting on Tuesday, when Governor Raghuram Rajan is forecast to keep borrowing costs on hold after reducing them to the lowest level in five years in April. The fastest growth among major economies along with reduced volatility in the rupee is improving confidence in India. Pacific Investment Management Co. and Aberdeen Asset Management Plc said in the past month they favor investments in the country.

Total returns from investing in rupee assets are forecast to be the highest after only Mexico among emerging markets

“The rupee stands to benefit from a combination of high carry and low volatility in a market environment such as this,” said Divya Devesh, Singapore-based foreign-exchange strategist for Asia at Standard Chartered Plc. It may, however, “be difficult for the rupee to make any significant gains” ahead of the Federal Reserve’s meeting and the U.K.’s June 23 referendum on its European Union membership, he said.

The rupee advanced 0.4 percent, the most since May 25, to 66.9775 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It strengthened to 66.8675 earlier, the strongest level since May 18. Standard Chartered predicts the currency to end June at 67.75 a dollar, Devesh said. The rupee is forecast to offer the best total returns among emerging-market currencies after Mexico’s peso this year.

India’s 10-year bond yield dropped one basis point to 7.47 percent, prices from the central bank’s trading system show. That compares with 7.80 percent in Indonesia and 2.10 percent in Thailand. Japanese notes offer yield below zero on debt maturing in 10 years.

All 35 economists in a Bloomberg survey see Rajan keeping the benchmark repurchase rate at 6.5 percent on Tuesday after data last month showed the economy expanded a world-beating 7.6 percent in the year ended March 31.

Record foreign-exchange reserves have also helped cut rupee swings by more than half.

The rupee is “a very high carry currency versus the dollar and other Asian currencies offer a lot less carry,” Luke Spajic, head of portfolio management for emerging Asia at Pimco, which oversees about $1.5 trillion in assets globally, said in an interview last month. “We have a favorable view on the rupee, we do like the carry.”

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