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Mumbai: India's rupee advanced for a second day on speculation lower US interest rates will prompt overseas funds to increase holdings of higher-yielding assets in the region.
The currency extended a rebound from a six-month low as the Federal Reserve's rate reduction yesterday widened the spread between the main rates between the US and India to 5.5 percentage points from 3.5 points at the start of the year. Record stock purchases by overseas investors in 2007 helped the rupee complete its best year in more than three decades.
"The case for overseas funds to bring in more investments into India has strengthened now," said Jayant Chiney, treasurer at state-owned Bank of India in Mumbai. "That should help the rupee rise."
The rupee rose as much as 0.4 per cent to 40.3625 a dollar before closing at 40.4275 in Mumbai, according to data compiled by Bloomberg. It may reach 40.25 by month-end, Chiney said.
The US Federal Reserve has lowered its funds target rate by three percentage points to 2.25 per cent since September. The Reserve Bank of India has held its benchmark at a six-year high since March 2007.
Overseas investors bought $17.2 billion more of local shares than they sold last year, before dumping a net $3.4 billion this year, data provided by the Securities & Exchange Board of India show.
The rupee also gained on speculation exporters were selling dollars to guard against further losses as the US currency slumped to record lows against the euro on five of the past six trading days.
"Exporters would prefer to sell dollars, so the sentiment is in favour of the rupee," Chiney said. "There will be preference not to hold dollars for long."
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