The currency advanced to its strongest level since May 3 after funds based abroad bought $523 million more shares than they sold in the first three days of this week, taking net purchases for 2011 to $1.6 billion, according to exchange data.
The rupee rose 0.6% this week to 44.33 per dollar and was up 0.2 percent on Friday, at close in Mumbai, according to data compiled by Bloomberg. Offshore forwards indicate the rupee will trade at 44.81 to the dollar in three months, compared with expectations of 44.98 on Thursday.
Indias 10-year bond yields were near their highest level in three weeks as this months increase in debt sales damped demand.
The yield on the 7.8% government bonds due April 2021 was little changed at 8.35% at close in Mumbai. It was unchanged from a week ago. It earlier touched 8.37 percent, the highest level since June 15.
The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose 4 basis points on Thursday and this week to 8.11%.
Forex reserves rise by $6.695 billion
Indias foreign exchange reserves increased by as much as $6.69 billion in the week ended July 1, to $315.715 billion, the RBI said on Friday. The reserves had come close to the $314 bn-mark on April 29, 2011, reaching $ 313 billion. The forex reserves were $309.02 billion in the previous week, ending June 24.