Rupee rebounded, snapping two weeks of decline, on optimism global funds and companies will continue to invest in Asia?s fourth-biggest economy because of higher returns.

The currency, up 7.7% this year, is Asia?s best performer, according to data compiled by Bloomberg. Private equity flows and foreign direct investment will increase in the coming years, boosting the rupee, as growth fuels demand in the worlds second-most populous country. The $854 billion economy expanded 9.4% in the year ended March 31, the fastest pace in almost two decades.

?We will see an increasing amount of flows from private equity investors, overseas companies and also through remittances,?said V Ravi Kumar, senior director of treasury at Mumbai-based IDFC Ltd. ?We will see a stronger rupee in a few months.?

The rupee rose 0.5% this week to 41.095 against the dollar, Bloomberg data show. It may strengthen to 39.80 by the end of March, the highest since May 13, 1998, Kumar said.

Blackstone Group LP, manager of the world’s largest private-equity fund, this week said it plans to buy 50.1% of Gokaldas Exports Ltd, the country’s largest garment exporter.

Trade minister Kamal Nath wants to double foreign direct investment into the country to $30 billion in the current fiscal year, after tripling it to $15.7 billion in the year to March 31.

The rupee pared the week’s gains on speculation Prime Minister Manmohan Singh, seeking a nuclear agreement with the US to secure fuel supplies, will lose the support of his Communist allies, who oppose the deal. India’s bonds fell on concern a dispute over the government’s proposed nuclear accord with the US may spur its communist allies to withdraw support to the ruling coalition.

The securities snapped a three-day rally after communists rejected claims by Prime Minister Manmohan Singh they will support the nuclear accord, a confrontation that could lead to mid-term elections. Bonds also fell as stocks and the rupee declined, adding to speculation political uncertainty will prompt investors to take money out of the country. ?Bonds have fallen along with other markets on political uncertainty,? said Manoj Swain, head of fixed-income trading in Mumbai at

Standard Chartered Bank Plc.

“The main worry is that if the government falls, we may see capital outflows from stocks and inflows of foreign direct investment may slow. That could tighten liquidity in the financial system.”