Rupee rallies; foreign investors buy in debt

(Reuters) - The rupee rallied to its strongest against the dollar in nearly three weeks to become the best performer in emerging Asia on Wednesday as foreign investors remained buyers of debt despite a bout of risk aversion in emerging markets.

The benchmark 10-year bond yields fell 4 basis points to 7.86 percent after foreign institutional investors bought a net $230 million worth of debt on Tuesday, even as overseas funds sold domestic shares.

India's bond markets have rallied since last year on expectations the Reserve Bank of India will start cutting interest rates as early as February due to sharply easing inflation.

"Though other majors are down, (dollar) selling by custodian banks helped rupee to gain today," said Hari Chandramgethen, chief dealer forex at South Indian Bank.

The rupee ended at 63.17/18 to the dollar on Wednesday compared with Tuesday's close of 63.57/58. It was the top performer of the day among Asian currencies tracked by Thomson Reuters.

That was the rupee's biggest gain against the dollar since Dec. 18.

(Reporting by Suvashree Choudhury and Dipika Lalwani; Editing by Anand Basu)