The currency touched this months high on optimism the governments sale of shares in state-owned Engineers India drew capital from abroad. The RBI boosted its overnight borrowing rate on July 27 by 0.5 percentage point, more than the quarter-point increase forecast by economists, to 4.5%. Overseas funds have pumped $9.3 billion into Indian equities so far this year, the most in Asia.
The rupee appreciated 1.1% this week to 46.41 per dollar. It rose as high as 46.395 earlier, the strongest level since June 29. The currency climbed 0.3% from Thursday.
However, government bonds completed a second monthly loss on speculation the central bank will raise interest rates further to curb inflation.
The yield on the benchmark 10-year bond climbed to the highest level in almost three months after the RBI this week raised interest rates for a fourth time in 2010. Gains in the wholesale-price index averaged 10.4% in the first half of the year, compared with 2.2% in the whole of 2009.
The RBI may not be completely done with what is required to bring down inflation, said Roy Paul, a deputy GM at Federal Bank. That speculation is expected to keep demand for bonds weak. The yield on the 7.80% bond due in May 2020 was 7.80%. The rate climbed 25 bps this month and rose two basis points from Thursday. The price fell Rs 1.7 per Rs 100 face amount, to Rs 99.97.