Mumbai: The rupee advanced against the dollar on Monday on speculation the central bank will raise interest rates to curb inflation, buoying demand for its higher yielding assets.
The Reserve Bank of India (RBI) won’t allow inflation to get out of hand, deputy governor Subir Gokarn said last week ahead of the central bank’s 29 January meeting. Policymakers left the reverse repo rate and repo rate unchanged at 3.25% and 4.75%, respectively, at the October meeting. Wholesale prices rose the most in at least a year in December, commerce ministry data show.
“If the central bank increases rates, it will boost inflows into local assets,” said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. “Foreigners will be attracted by the higher yield.”
The rupee advanced 0.3% to 45.6450 per dollar at close in Mumbai, according to data compiled by Bloomberg. It reached 45.275 on 11 January, the strongest level since September 2008. The currency strengthened 1.8% this year, the third best performer among Asia’s 10 most active currencies outside Japan.
Overseas investors bought $1.6 billion (Rs7,312 crore) more of local stocks than they sold this year through 14 January, according to data from the Securities and Exchange Board of India.
The nation’s benchmark Wholesale Price Index climbed 7.31% in December from a year earlier, following a 4.78% gain in November, the commerce ministry said on 14 January.
Offshore contracts indicate bets the rupee will trade at 45.69 to the dollar in a month, compared with 45.78 on 15 January.
Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.