Rupee in India hitting new highs

MUMBAI (Reuters) - The rupee surged more than 1 percent to a fresh nine-year high on Tuesday, after the central bank did not tighten capital controls at its policy review as some in the market had expected.

Investors also bet the central bank would allow further rupee appreciation near-term rather than intervening to stem its rise, spurring them to build long positions in the local unit in anticipation of more overseas investment in Indian markets.

The partially convertible rupee ended at 41.10/12 per dollar, off the day's peak of 41.04, its highest since May 1998, according to Reuters data. It ended at 41.67/68 on Monday.

"The market was wary there would be some measure in the credit policy, but there was really nothing," said Pradeep

Khanna, director and head of currency trading, treasury and capital markets at HSBC India.

"All official statements seemed to say that they (the Reserve

Bank of India) are absolutely comfortable and have no problem

(with the rupee's strength)," added Khanna, who saw the rupee testing 41 per dollar on Wednesday.

Instead of tightening controls, the central bank left its interest rates unchanged and opened the door to more capital outflows as a way of offsetting upward pressure on the rupee.

Foreign funds have bought a net $956 million of Indian shares this month and nearly $2.6 billion in 2007. They bought nearly $8 billion last year.

The rupee is up 7.7 percent this year -- the best performing Asian currency against the dollar. The next best performer is the Thai baht, which has gained about 3.6 percent.

The rupee has risen about 5.5 percent this month, and is trading more than 14 percent above a three-year low of 47.04 hit last July.

According to a JPMorgan index, the rupee is overvalued by nearly 14 percent, compared with about 8.5 percent a month ago.

Some traders expressed caution about the rupee's rally, after the central bank on Tuesday raised the ceiling for market stabilisation bonds, which it uses to sterilise funds pumped into the system by its intervention.

"By raising the ceiling, the central bank has given itself more room to intervene against the rupee if they want to," said a dealer at a foreign bank.

The central bank bought a record $19.7 billion in the four months to February, in a bid to thwart the rupee's rise, and the market suspects it intervened in March as well.