What a Quarter for the Indian Rupee vs. the US Dollar

India's rupee rose, the biggest quarterly gain in 3 1/2 decades, as the world's second-fastest pace of economic growth and a $1 trillion stock market attracted overseas investors.

The currency gained 6.8 percent this quarter as the government allowed the rupee to advance to make imports cheaper. India's current account showed a surplus for the first time in a year in the three months through March as software exports increased and oil imports slowed, a report showed today.

Commerce and Industry Minister Kamal Nath expects foreign investment may double to $30 billion this fiscal year and India's 300 million strong middle class are buying more imported goods. Share sales may double this year to an all-time high, buoyed by demand from investors attracted by the fastest pace of growth in almost two decades, JPMorgan Chase & Co. said today.

The currency had its fourth straight quarterly advance as overseas investment in local equities more than doubled in the week through June 27 from the previous five days. The rupee also advanced on speculation banks will buy it to increase their local-currency holdings as borrowing costs in the local money market increase.

``Capital inflows continue to be strong, providing support to the rupee,'' said V. Rajagopal, chief currency trader at Kotak Mahindra Bank Ltd. in Mumbai. ``Money is coming in various forms such as stock market inflows, export earnings, corporate borrowings and direct investment.''
Weekly Advance

The rupee rose 0.1 percent to 40.7175 against the dollar this week, its third straight weekly gain, as of the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. The rupee declined only in two weeks in the current quarter, which saw the currency gain more than all its Asian peers.

Reserve Bank of India Governor Yaga Venugopal Reddy has increased the benchmark overnight lending rate six times in the past 1 1/2 years to slow inflation as it accelerated to the fastest pace in two years in January.

Higher borrowing costs at home is encouraging Indian companies to borrow more abroad to benefit from lower U.S. dollar interest rates. Overseas borrowing by local firms increased 59 percent to $5.1 billion in March from the previous month, according to the central bank. The benchmark rate for companies borrowing in the U.K. is more than 3 percentage points lower than the comparable Indian rate.

The dollar is also falling against major currencies as traders bet the Federal Reserve won't raise rates. The Fed yesterday kept its benchmark rate unchanged and reiterated inflation is the ``predominant'' concern, reducing speculation it will cut borrowing costs this year. The U.S. currency headed for a sixth quarterly loss against the euro and British pound, the worst losing streak in 21 years.

Funds Buying

Global funds bought an average $71 million more Indian stocks each day than they sold in the week ended June 27, compared with $35 million the previous week, according to the Securities and Exchange Board of India. They invested $402.5 million on June 21, the most in a day since this fiscal year began April 1.

Inflation slowed for the 10th week to a 13-month low, a government report showed today. Wholesale prices rose 4.03 percent in the week ended June 16, the least since the seven-day period through April 29, 2006, the Ministry of Commerce & Industry said. India's economy grew 9.2 percent in the year ended March 31, the fastest pace in almost two decades.

India's current account surplus was $2.56 billion, compared with a deficit of $2.78 billion in the previous quarter, the Reserve Bank of India said in faxed statement in Mumbai today. India had a current account surplus of $2.76 billion in the year-ago period.


Cash Requirements

The rupee also rose on speculation banks exchanged dollars to meet cash requirements after the overnight borrowing rate rose to the highest in six weeks. Indian lenders have to set aside cash equivalent to 6.5 percent of deposits as reserves.

The overnight money market rate rose for a fifth day to as high as 9.13 percent today, the most since April 27, according to Bloomberg data. It climbed after companies paid quarterly taxes and the government increased debt sales, draining spare cash in the system. The government sold bonds and treasury bills worth a total 550 billion rupees ($13.5 billion) this month, compared with 445 billion rupees last month.

Monthly inflows of direct investment averaged $1.3 billion in the fiscal year ended March 31, compared with $461.7 million in the previous year, according to government data.

``The call money rate is tight and that also may be prompting some unwinding of dollar positions,'' Kotak's Rajagopal said.

The shortage of funds spurred lenders yesterday to borrow from the central bank for the first time since May 25 to raise cash. Banks borrowed a net 95 billion rupees from the Reserve Bank yesterday via its daily repurchase agreement auctions.