Saturday 26 January 2008

India Rupee Gains as Fed Rate Cut May Boost Emerging Markets

India' rupee gained for a second day on speculation global funds will buy higher-yielding emerging- market assets after the Federal Reserve cut its key interest rate.

The currency added to yesterday's gain, which was the most in almost two months, after Finance Minister Palaniappan Chidambaram said yesterday the reduction in U.S. borrowing costs may attract more capital flows to the South Asian nation.

``The U.S.-India interest-rate differential got wider,'' said Puneet Sharma, chief currency trader at state-owned Allahabad Bank in Mumbai. ``That, coupled with India's strong economic growth, should attract more capital flows, which will help the rupee.''

The rupee strengthened 0.2 percent to 39.3975 per dollar as of 12:29 p.m. in Mumbai, according to data compiled by Bloomberg. It climbed as high as 39.355.

The spread between two-year Indian government bonds and similar-maturity U.S. Treasury notes widened to 5.44 percentage points this week, the most in six years, according to data compiled by Bloomberg.

The Fed lowered its target overnight lending rate on Jan. 22 by 0.75 percentage point in an emergency decision aimed at averting a recession.

Capital Inflows

``We expect larger capital inflows,'' Chidambaram told reporters while attending the World Economic Forum on Davos, Switzerland. ``That's just an expectation, and we have to see how it works out.''

Equity purchases by overseas money managers rose almost sixfold to $8.1 billion in the month immediately following the Fed's decision to start lowering rates on Sept. 18, from $1.4 billion in the preceding 30 days.

A record $17.2 billion of net share purchases last year strengthened the currency 12.3 percent, the biggest annual gain since at least 1974. The rally stalled this year as this week's slump in stocks caused investors to pull money out of the country. The rupee has dropped 0.2 percent this week, Bloomberg data show.

The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, is headed for a second week of losses as concern a recession in the world's biggest economy will slow global growth.

The world economy will grow 3.8 percent in 2009, compared with a previous estimate of 4.1 percent as the U.S. slips into a recession in the first half of this year, UBS AG, Europe's biggest bank by assets, said yesterday.

India's economy has grown an average 8.6 percent a year since 2003, the fastest after China among major economies.