Bloomberg News

Rupee Gains on Speculation Central Bank to Lift Interest Rates

October 25, 2011

Oct. 25 (Bloomberg) -- India’s rupee gained for a second day on speculation the central bank will increase borrowing costs, increasing the yield appeal of the nation’s bonds.

The Reserve Bank of India will raise its repurchase rate by 25 basis points to 8.50 percent at 11 a.m. in Mumbai today, according to 18 of 28 economists surveyed by Bloomberg. Ten forecast no change. The central bank said yesterday the rupee’s weakness has emerged as a “new source” of price pressure and the challenge to tame inflation “remains significant.” The rupee has declined more than 10 percent this year, the worst performance among the 10 most-traded Asian currencies.

“A 25-basis point move is already priced in,” analysts at Credit Agricole CIB, including Hong Kong-based Frances Cheung, wrote in a report published today. “Still, over the past few months, the rupee has underperformed its regional peers to a degree that is not justified by fundamentals.”

The rupee strengthened 0.2 percent to 49.7450 per dollar as of 9:27 a.m. in Mumbai, according to data compiled by Bloomberg. It touched 49.6575 earlier, the strongest level since Oct. 20.

Overseas funds’ holdings of Indian bonds reached a record $22.2 billion on Oct. 21, exchange data show, as the extra yield on 10-year sovereign notes over U.S. Treasuries touched 660 basis points, or 6.60 percentage points. High-yield bond funds tracked by EPFR Global posted their biggest inflows on record in the week through Oct. 19 on speculation European policy makers will contain their region’s debt crisis.

European leaders, who will hold their second summit in four days tomorrow, are seeking an agreement on bolstering the region’s rescue fund, recapitalizing banks and providing debt relief to Greece to avoid contagion spreading to Italy and Spain.

Offshore forwards indicate the rupee will trade at 50.52 to the dollar in three months, compared with expectations for a rate of 50.69 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

--Editors: Andrew Janes, Anil Varma

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.


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