Indian rupee (Photographer: Scott Eells/Bloomberg)

Rupee Gains With Indian Stocks, Bonds as Fed Sparks Inflow Hopes

(Bloomberg) -- The rupee climbed the most in four months and stocks rose, tracking advances across Asian peers, on optimism demand for Indian assets will pick up after the Federal Reserve delayed raising interest rates.

While agreeing that the case for a rate rise had strengthened, Chair Janet Yellen Wednesday argued the world’s largest economy has more room to run and that it made sense to put off a move for now. Indian sovereign bonds rallied. Global funds have raised holdings of local stocks and notes this quarter by the most since the period ended March 2015, putting the rupee on course for its first quarterly advance in six.

“Markets are mainly reacting to the Fed as there were some expectations of rate hike,’’ said Bhupesh Bameta, head of research for currencies and rates at Edelweiss Financial Services Ltd. in Mumbai. “The risk-on has more legs to go post Fed and India will see more inflows coming its way, which will have positive impact for the rupee and bonds.”

The rupee climbed 0.5 percent, its biggest gain since May 25, to 66.665 per dollar, prices from local banks compiled by Bloomberg show. It is up 1.3 percent since June 30. The yield on government notes due September 2026 slid four basis points to 6.81 percent, according to prices from the central bank’s trading system. The S&P BSE Sensex index of shares rose 0.9 percent at the close in Mumbai.

The government announced the members of a new monetary policy committee, the final step in a drive to overhaul its 81-year-old central bank. Three independent economists named by the government on Thursday will join Governor Urjit Patel, his deputy in charge of monetary policy, and another central bank executive in determining borrowing costs in the world’s fastest-growing big economy. Each will have one vote and Patel will hold an additional tie-breaker, guided by a newly established inflation target.

However, it’s unclear if the MPC will undertake the next policy review on Oct. 4, because rules require that the Reserve Bank of India announce a schedule of meetings at least a week before the first one.

Capital Inflows

Foreigners have bought $3.8 billion of Indian equities in the current quarter, the highest inflow in Asia after Taiwan and South Korea, lured by the passage of key economic reforms, improvement in public finances and timely monsoon rains after two years of drought.

“The Fed has ensured that the global liquidity rally continues,” R.K. Gupta, managing director at Taurus Asset Management Co., said by phone from New Delhi. “India is on a stronger footing relative to other emerging markets due to its strong macros and should get a fair share of the global fund flows. At the same time, we need to be selective while stock picking as valuations are expensive.”

The Sensex is valued at 16.5 times projected 12-month earnings compared with 12.7 times for the MSCI Emerging Markets Index. The valuation is near the most expensive level since January 2011 reached earlier this month.

  • Hero MotoCorp Ltd. climbed for the first time this week.

  • State Bank of India and ICICI Bank Ltd. paced gains among lenders.

  • Reliance Defence and Engineering Ltd. rose to a two-week high after it emerged the lowest bidder for a 9.2 billion rupees Indian Coast Guard order.