Rupee closes in on 1-year high

MARKET ROUND-UP

Rupee rose to near its highest in 12 months, rounding six months of gains, after the central bank raised the interest rate for overnight loans for the fifth time in the past year and Standard & Poor's yesterday lifted the nation's debt rating.

Asia's fourth-largest economy may draw more overseas funds into stocks and bonds after S&P raised the nation's rating to investment grade for the first time in 14 years on record growth and rising foreign exchange reserves. Governor Yaga Venugopal Reddy lifted the Reserve Bank of India's repurchase rate by a quarter per cent to 7.50 per cent.

"The rating upgrade is a big boost for sentiment and should help increase the pace of capital flows, sooner rather than later,'' said Sudarshan Bhatt, chief currency trader at the state-owned Corporation Bank in Mumbai.

The rupee rose 0.1 per cent to 44.1850 against the dollar as of the 5 pm close in Mumbai, from 44.235 on January 29, according to data compiled by Bloomberg. The currency earlier advanced to 44.11, a one-year intraday high.

The country's economy grew 9 per cent in the financial year through March 31, 2006, the fastest pace since the country's independence in 1947, helping house prices and the benchmark stock index double in the past two years, and attracting overseas investment.

The central bank today raised its growth forecast to as much as 9 per cent for this financial year, from an earlier prediction of about 8 per cent, saying in a statement that the performance "has turned out to be somewhat better than anticipated on the back of strong growth in manufacturing and services''.

Demand for manufactured and other products is rising, as per-capita income in the country doubled in the past nine years and the number of households earning an annual income of at least $10,000 is rising more than 20 per cent a year, according to McKinsey & Co.

The country's growth prompted foreign investors to buy a net $8.31 billion of stocks in 2006 after a record $10.7 billion the year before, helping the benchmark stock index rise 31 per cent in the past six months.

S&P said it has a stable outlook on India's local and foreign-currency debt and raised its rating by one notch to BBB-. That may enable more fund managers to buy the country's stocks and securities.

The limit on holdings of government bonds by overseas investors was raised by 30 per cent to $2.6 billion, the Securities and Exchange Board of India said on January 19.

The rupee rose in the forwards market. Investors who want to buy forward contracts to purchase dollars a year from now using rupees need to pay 3.12 per cent more than the exchange rate in the cash market, compared with 3.23 per cent on January 29, according to Bloomberg data.