Bullish growth erases Re losses

The rupee erased earlier losses on speculation that the nation's sustained economic growth will attract more overseas investors.

"The rupee will maintain an appreciating bias in the medium term as capital inflows continue,'' said Agam Gupta, head of currency and derivatives trading at Standard Chartered in Mumbai.

"Foreign direct investment and private equity investments are set to pick up significantly, while external commercial borrowings have been high of late," he added.

Monthly inflows of direct investment into India doubled to $731 million in the first half of the current fiscal year ended March 31, compared with the same period the previous year, according to government data.

The rupee changed little at 44.27 against the dollar as of 2:48pm in Mumbai, from 44.29 yesterday. It earlier fell to 44.35. The currency also changed little this week, after gaining for the previous three weeks.

India's economy grew 9.2 per cent in the three months to September 30, the second-fastest pace among the world's major economies after China, up from an 8.9 per cent gain the previous quarter.

The Reserve Bank of India forecasts the economy will grow as much as 8 per cent this fiscal year. The rupee dropped earlier on speculation companies will take advantage of its three-week rally to buy dollars to pay for imports and to repay debt.

A combination of low oil prices and gains in the rupee, which reduces the cost of imports, may have prompted refiners and other importers to buy dollars. The rupee rose almost 1 per cent in the two weeks through yesterday, while oil prices fell 11 per cent.

"Corporate demand for dollars is expected to pick up every time the rupee makes an advance,'' said S T P Venugopal, chief currency trader at Central Bank of India in Mumbai.

"We've seen some dollar buying by foreign banks today, probably on behalf of companies. There was also some oil-related dollar demand.''

India's oil imports increased 31 per cent in the quarter through September, the central bank said on December 29. The nation meets through-quarters of its energy requirements through imports.

Crude oil traded near an 18-month low in New York as mild weather curbed consumption and fuel stockpiles jumped in the US, the world's largest energy user.

Bonds fall on worries over rising government debts

Bonds declined on concern that government debt sales will drain money from the banking system in the coming weeks, leaving lenders with less cash to buy debt.

Yields on 10-year debt rose from a three-week low as the Centre is scheduled to borrow Rs 9000 crore this week, according to its bond auction calendar.

Bonds also fell on speculation that the Reserve Bank of India will increase borrowing costs this month to curb inflation stoked by growing demand in the world's second-fastest growing economy.

"Forthcoming government bond auctions may put some pressure on liquidity,'' said NN Jayashankaran, a director at CorpBank Securities Ltd., a primary dealer in Mumbai that underwrites government debt sales.

"The Reserve Bank is likely to increase interest rates at this month's policy review to cool inflationary expectations," he said.

The yield on the benchmark 8.07 per cent note due January 2017 rose 1 basis point, or 0.01 percentage point, to 7.54 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. The yield fell 9 basis points on Tuesday, the biggest one-day decline since September 20, to a three-week low of 7.53 per cent.

The price fell 0.06, or 6 paise per Rs 100 face amount, to 103.71. Bond yields move inversely to prices. India is scheduled to sell bonds worth Rs 14,000 crore this month.

It plans to raise Rs 31,000 crore through bond auctions between January and March, as part of the Rs 152 crore it is seeking to borrow in the current fiscal year.

The Reserve Bank of India raised its overnight lending rate four times in 2006 to 7.25 per cent to restrain inflation. The bank is due to review its policy on January 31.

The annual inflation rate accelerated to 5.43 per cent in the week ended December 16 from 5.32 per cent a week earlier, the Ministry of Commerce and Industry had said earlier.

The pace is approaching the upper end of a 5 per cent to 5.5 per cent range forecast by RBI for this fiscal year. The economy grew 9.2 per cent in the quarter through September, beating the 8.9 per cent gain in the previous quarter.

Bonds gained earlier after money market interest rates more than halved from a nine-year high reached on December 29, suggesting surplus cash at banks has increased.

"Overnight rates have moved lower and can stay around 8-10 per cent for the rest of the week, which is good for bonds," said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai.

Overnight money rates fell to 6.38 per cent from 10.5 per cent on Tuesday, according to data compiled by Bloomberg. The rate had climbed to 19 per cent last week after banks lifted reserves to 5.25 per cent of deposits from 5 per cent on December 23.

They must raise them again to 5.5 per cent from January 6. The two-step increase will effectively drain Rs 13,500 crore from the banking system, RBI said.