New Delhi: The rupee rose for a second day on speculation that gains in local stocks will prompt foreign institutional investors (FIIs) to increase purchases.
The rupee has strengthened almost 12% this year, the top performer of Asia’s 10 most actively-traded currencies, as overseas investors bought a record $16.4 billion more stocks than they sold.
Finance minister P. Chidambaram on Tuesday said proposed curbs on offshore derivatives are aimed at improving disclosure and aren’t a ban on investment.
“The rupee’s strength will be tied to the fortunes of the stock market.” said V. Kumar, chief currency trader at State Bank of Travancore in Mumbai. “Sentiment has turned for the better after repeated assurances by the regulator and officials.”
The currency climbed as much as 0.4% to 39.4575 against the dollar before closing at 39.58 in Mumbai, according to data compiled by Bloomberg.
It strengthened 0.8% yesterday, the most in a month.
The Securities and Exchange Board of India’s proposals on 16 October to restrict investment by unregistered global funds in derivatives caused a plunge in the Bombay Stock Exchange’s key Sensitive Index the following day. The regulator this week said it will scale back the planned caps and make it easier for investors to register.
The stock index rebounded 5.4% this week after declining 4.7% in the five days ended 19 October, Bloomberg data show.
The rupee pared gains on speculation the central bank sold it to prevent a stronger currency from hurting exporters. The Reserve Bank of India has bought a record $40 billion in the eight months to August to curb the rally in the currency that touched a nine-and-a-half year high this month.
“The presence of the central bank again in the currency market is beginning to weaken the rupee,” said V. Rajagopal, chief currency trader at Kotak Mahindra Bank Ltd in Mumbai. “Stocks haven’t really performed the way they did yesterday, reflecting on the rupee.”
The “rapid appreciation” of the rupee has caused some problems for exporters, Chidambaram said on Tuesday.
“We would like to maintain a competitive exchange rate without hurting investment,” he said. “The value is set by the market.”
Growth in exports of goods slowed to an average 14.4% in the eight months through August, from 22.4% a year earlier, government data show.
India may fall short of achieving its $160 billion export target in the year to 31 March as a stronger rupee erodes sales overseas, commerce secretary G.K. Pillai said on 8 October.