Oct. 28 (Bloomberg) -- India’s rupee completed its biggest weekly gain in two years after the central bank increased interest rates for the seventh time this year and European leaders agreed on a plan to stem their region’s debt crisis.

The currency has risen every day this holiday-shortened week as the Reserve Bank of India raised its repurchase rate to 8.50 percent from 8.25 percent on Oct. 25, and reiterated inflation will slow to 7 percent by March. French President Nicolas Sarkozy said European Union leaders and banks have agreed to a 50 percent writedown on Greek debt and the region’s bailout fund will be enlarged. India’s financial markets were closed on Oct. 26 and Oct. 27 for public holidays.

“Risk has rallied strongly since the European summit outcome and the rupee is playing catch up,” said Priyanka Kishore, a Mumbai-based currency strategist at Standard Chartered Plc. “In the near future we could see the rupee extend this rally.”

The rupee strengthened 2.6 percent this week and 1.5 percent today to 48.7663 per dollar in Mumbai, according to data compiled by Bloomberg. That’s the biggest weekly gain since October 2009.

European leaders agreed to expand their bailout fund to $1.4 trillion and Sarkozy said China will “cooperate closely” to ensure the Group of 20 will contribute to the enlarged fund, while a person familiar said Japan plans to support the increase.

Offshore forwards indicate the rupee will trade at 49.44 to the dollar in three months, compared with expectations for a rate of 50.22 on Oct. 26. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

--Editors: Andrew Janes, Abhay Singh

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