Rupee rose for a third day on speculation the Reserve Bank of India will raise interest rates next week for a fourth time this year, making local assets more attractive to investors seeking higher yields.
The currency pared the week?s loss after exchange data showed overseas holdings of the nation?s stocks and bonds touched all-time highs of $81.6 billion and $15.4 billion in the past week. The RBI will increase its benchmark reverse-repurchase rate by a quarter-percentage point to 4.25% on July 27.
?The rupee at the current level looks very cheap and we are advising our clients to be long on the currency,? said Ramit Bhasin, head of markets in India at Royal Bank of Scotland Group. ?With these rate hikes, and the carry differential that is picking up, the rupee will get stronger.?
The currency appreciated 0.4% to 46.945 per dollar, paring this week?s decline to 0.4%, according to data compiled by Bloomberg. It touched 47.385 on July 20, the weakest level since June 7.
Benchmark bonds completed a weekly loss on speculation the central bank will increase interest rates for a second time this month to slow inflation that has exceeded 10% in the past five months.
Yields on 10-year securities rose on Friday to near their highest in a more than a month, after Prime Minister Manmohan Singh?s top economic adviser said the central bank must raise borrowing costs to cool increase in prices. The reverse-repurchase rate will be raised by a quarter of a percentage point to 4.25%, according to all 20 economists surveyed by Bloomberg before the July 27 policy review.
?Investors seem to be averse to taking any positions ahead of the crucial meeting,? said Roy Paul, a deputy general manager at Federal Bank. ?Some tightening is expected to curb inflation.?
The yield on the 7.80% note due in May 2020 rose four basis points this week, or 0.01 percentage point, to 7.68%. The rate touched 7.69% on July 21, the highest rate since June 14. The price fell 0.05, or 5 paise per Rs 100 face amount, to Rs 100.75.