Re strengthens for a 5th day on economic outlook

The rupee strengthened for a fifth straight day, the longest winning streak in two months, as the government predicted the nation’s economy will expand the most in three years.

Gross domestic product will rise 8.6 per cent in the year ending March 31 after having increased 8 per cent in the previous 12 months, the Central Statistical Organisation said in a statement on Monday, matching the median estimate of economists in a Bloomberg survey. The rupee has gained 0.8 per cent in February on speculation India’s yield advantage will attract investments after the central bank raised borrowing costs last month for the seventh time in a year.

“The fundamentals are good for the rupee,” J Moses Harding, a Mumbai-based executive vice president at IndusInd Bank Ltd, wrote in a research note on Monday. “Near-term uncertainties are also diluted by interest-rate play.”

The rupee advanced 0.2 per cent to 45.485 per dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg. The rupee will appreciate to 44.80 by the end of this quarter, according to the median estimate of 17 analysts in a Bloomberg News survey.

Foreign investors boosted holdings of local bonds by a record $2.5 billion in January as the Reserve Bank of India increased the repurchase rate by 25 basis points to 6.50 per cent. India’s 10-year government bonds offer a yield of 8.20 per cent, the highest among the region’s investment-grade bonds and more than double the 3.68 per cent on Treasuries, data compiled by Bloomberg show.

‘Forerunner’
The rupee may return 12.7 per cent, including interest-rate income, by the end of this year, more than four times the 2.9 per cent gain predicted for China’s yuan, according to Bloomberg data.

“The rupee will gain from here as the Asian economic outperformance continues, with India remaining a forerunner and capital continuing to enter the region,” said Kenneth Akintewe, a Singapore-based portfolio manager at Aberdeen Asset Management Plc that oversees $287 billion.

Bonds drop
Benchmark bonds fell, pushing yields higher for a third day, on speculation investors will refrain from buying debt as accelerating inflation may prompt the central bank to boost interest rates.

The yield on the benchmark 7.80 per cent note due May 2020 climbed one basis point to 8.21 per cent as of the 5 pm close in Mumbai, according to the central bank’s trading system. The price fell 0.08, or 8 paise per Rs 100 face amount, to Rs 97.38.

The Reserve Bank of India is maintaining its forecast of 7 per cent inflation for the year ending March 31, Deputy Governor Subir Gokarn said on Monday.

India’s government predicted the economy will expand the most in three years. The $1.3 trillion economy will probably expand 8.6 per cent in the year ending March 31 from a year earlier, the Central Statistical Organisation said in a statement on Monday. The projection was in line with the median of 16 estimates in a Bloomberg News survey.

The Reserve Bank of India increased borrowing costs six times in 2010. The repurchase auction rate, at which it lends to banks overnight, was raised by 25 basis points to 6.50 per cent on January 25.