The currency touched its strongest level in a week after Sebi data showed foreign investment in stocks rose $6.6 billion this year to an all-time high of $79.4 billion on June 24. The Sensex has gained 4.9% this month after the government said June 11 that factory output grew 17.6% in April, near the most in at least 16 years.
The important thing for the rupee is how the Sensex fares, said Philip Wee, a Singapore-based senior currency economist at DBS Group Holdings. The rupee is a capital- flow story due to its twin deficits. The fiscal deficit is doing well as the economy is doing well. But the problem is that stock flows are needed for the current account.
The rupee strengthened 0.2% to 46.21 per dollar. It rose as high as 46.055 earlier, the strongest level since June 22. The currency may advance to 45.80 by September 30 and 45.60 by December 31, Wee said.
Government bonds gained on speculation an increase in fuel prices last week will help the government trim the budget deficit from a 16-year high.
Bonds also advanced after leaders from the Group of 20 nations agreed targets to improve fiscal discipline. Singh plans to reduce the deficit to 5.5% of gross domestic product in this fiscal year ending March from 6.9% last year, reducing pressure on the market from bond sales.
The yield on the 7.80% note due May 2020 fell six basis points to 7.59%, according to the central banks trading system. The price rose 0.41, or 41 paise per Rs 100 face amount, to Rs 101.41.