Rupee completed its best week since January on speculation the central bank will raise borrowing costs a third time this year to curb inflation, making local assets more attractive to investors seeking higher yields.
The currency climbed for a third day to a one-month high after the government said this week that inflation accelerated in May to near the fastest pace in 17 months. The Reserve Bank of India may raise its benchmark rate before a scheduled July 27 policy meeting, said Chia Woon Khien, Singapore-based head of currency and rates strategy for Asia excluding Japan at Royal Bank of Scotland Group .
?The chances of an inter-meeting rate hike are very high,? Chia said. ?Because of that, the rupee will look attractive. In this kind of global environment, anyone hiking rates will be seen in a positive light. India is also raising rates from a position of strength.?
The rupee gained 1.4% this week to 46.1775 per dollar, according to data compiled by Bloomberg. It rose as high as 46.07, the strongest level since May 19.
India?s 10-year bonds also advanced on speculation demand will improve as the government buys back debt, injecting cash into the financial system.
The government plans to purchase Rs 10,000 crore ($2.16 billion) of securities at an auction today after licence-fee payments by phone companies drained cash from banks this month, pushing money-market rates higher. Bonds also rose after US 10-year fixed-income yields slid for a second day on Thursday, spurring speculation interest rates will remain low.
?Bonds are doing better today as the debt-buyback program may help improve the supply of cash in the banking system,? said Arvind Sampath, head of interest-rate trading at Standard Chartered Bank. ?The drop in US yields is also supporting sentiment in fixed-income markets.? The yield on the 7.80% note due May 2020 fell eight basis points to 7.56%. The price rose 0.57, or 57 paise per Rs 100 face amount, to 101.64.