JPMorgan Chase & Co raised its forecast for the Indian rupee, reversing its earlier call for a weaker currency, on expectations Asia?s fourth-biggest economy will attract more foreign capital.

The larger-than-expected cut in interest rates by the US Federal Reserve this month has revived global appetite for emerging-market stocks, Vikas Agarwal, JPMorgan?s currency strategist in Mumbai, and Rajeev Malik, the investment bank’s economist in Singapore, wrote in a research note to clients on Friday. Inflows and a weaker dollar globally may force the Reserve Bank of India to allow gains in the rupee, they wrote.

?The magnitude of inflows poses a stiff challenge to the RBI, particularly in the backdrop of a sharp and substantial global weakening of the dollar,? Agarwal and Malik said. ?The RBI is mindful of costs associated with intervention.?

The rupee will strengthen to 39.5 per dollar by year-end, compared with an earlier forecast of 42, JPMorgan said. The currency may climb to 38 by September 2008, Agarwal forecast.

The rupee, the second-best performer among 15 most-actively traded currencies in the Asia-Pacific region, was at 39.75 against the dollar in Mumbai.

The currency, which has risen 11.4% this year, climbed as high as 39.62 on September 26, the strongest since April 1998.

Overseas investors bought $11.64 billion more in Indian shares than they sold this year, surpassing the record in 2005, data provided by the Sebi show.

The Bombay Stock Exchange Sensitive Index, or Sensex, climbed almost 40% in the past year, fuelled by the purchases.

Portfolio and foreign direct investment will help keep the country’s balance of payments in surplus, adding to the rupee’s strength, JPMorgan said. Still, higher oil prices, slowing exports and rising imports may widen the current-account deficit, posing a risk to the rupee, Agarwal and Malik said.

Growth in India?s exports slowed to 13.7% in the seven months through July, from 22.7% a year earlier, while imports grew faster at 26.7% from 16.4% a year ago, data provided by the trade ministry show.

?Bloomberg