Foreign fund inflow hopes boost rupee

MARKET ROUND-UP

India's rupee closed at a 20-month high on speculation investors abroad will increase purchases of the nation's stocks.

The rupee advanced a second day as growth in Asia's fourth-largest economy is estimated to be the second-fastest in the world after China in the year to March 31. The acceleration may boost company earnings and returns for international investors as the government aims for an expansion of about 10 percent by 2012.

"Confidence of overseas investors on India has not withered," said Parthasarathi Mukherjee, treasurer at UTI Bank in Mumbai. "That's why flows continue to remain strong."

The rupee rose 0.6 per cent to 43.30 against the dollar at the close, the highest since July 21, 2005, according to data compiled by Bloomberg. It may advance to 43.25 by the end of this week, Mukherjee said.

India's currency is headed for its biggest monthly gain since December 2004, rising 2.2 per cent, and a third straight quarter of strengthening.

Investors abroad bought $1.3 billion more of Indian stocks than they sold this year through March 22, according to the Securities & Exchange Board of India. They purchased $8 billion of equities for the full calendar year 2006 and a record $10.7 billion in 2005.

The Bombay Stock Exchange's benchmark Sensitive Index jumped 6.9 per cent last week, the most in 11 months. Today, the index fell 1.2 per cent. India expects its economy to grow 9.2 per cent in the year ending March 31.

The currency's pace of advance was tempered by speculation importers will buy more foreign exchange to settle month-end bills. The currency may snap three weeks of gains as companies such as Indian Oil Corp. sell the rupee to make overseas payments.

"I would recommend importers who have a payment liability in the near term to buy dollars now," said M. Thiruvadi, chief currency trader at state-owned Indian Overseas Bank at Chennai in south India. "The rupee may find it difficult to advance now to levels of any significant importance." The currency may decline to 44 this week, Thiruvadi said, from 43.58 on March 23.

India's oil imports in January rose 15 percent to $4.79 billion, the government said on March 1. The nation meets three-quarters of its energy needs from abroad. The Commerce & Industry Ministry will release the data for February this week.

The central bank, which is speculated to have stemmed gains in the currency by purchasing dollars until mid-March, has allowed the rupee to advance to a 20-month high as selling it adds funds to the banking system, stoking inflation.

Policy makers are torn between buying dollars to cap gains in the local currency and draining rupees to curb loans. Reserve Bank of India Deputy Governor Rakesh Mohan on March 14 said the focus of the central bank will remain "liquidity management," and has often said it doesn't target any specific exchange rate.

"Monetary policy has taken precedence over the exchange-rate management," said Shubadha Rao, chief economist at YES Bank in Mumbai. "Continuous sterilization involves a cost and has other implications at a time when the inflation rate is high. I think the central bank has let the rupee find a level on its own amid the huge capital flows that we are seeing.''

The rupee failed to break beyond 44 against the dollar last month, a one-year intraday high then, as the central bank stepped up purchases of dollars to stem its advance and protect exports that account for about a 10th of the economy.

Foreign-exchange reserves rose $14.6 billion in the four weeks through March 2, suggesting the central bank increased dollar purchases in February. The central bank said it bought $7.8 billion in the three months through January.

The rupee has gained 7.9 percent from its three-year low on July 19.