MUMBAI: The Indian rupee rose to a two-month high and shares climbed on revival of US dollar flows as yield-chasing overseas investors lapped up bonds, as well as undervalued shares which lost more than 35% in US dollar terms last year.
Outlook for inflows are brightening with emerging markets poised to cut interest rates after China's 8.9% economic growth in the fourth quarter, the slowest in 10 quarters.
The rupee could gain further since demand for dollars may subside after the duty on precious metals imports was nearly doubled.
The Indian rupee, which was the worst performer in Asia last year, is turning out to be the best this year so far due to measures by the Reserve Bank of India, despite imports still outstripping exports which many say could return to haunt the currency.
The currency rose 1.2% to close at 50.70 to the dollar. It is up 6% this year and 6.6% from its life low of 54.30 touched on December 15.
The benchmark Sensex rose 1.7%, the least among major markets with Hong Kong, Shanghai, Korea and Singapore gaining more. It has risen 6% since January 2, making it the best-performing index in Asia.
"There have been inflows from FIIs, both debt & equity, and possibly an enhanced interest in liberalised NRE deposits," said Ananth Narayan, regional head at StanChart.
"Overall cautious risk-on sentiment in equity markets, and today's announcement of increase in gold/silver duties also favour the INR - gold imports have been at record levels, contributing to a big part of the trade deficit."
The outlook on the Indian rupee has improved as foreign funds raised holdings of debt securities by $2.6 billion in January to a record $28.7 billion and equity purchases have increased $559 million.
While 10-year Indian sovereign debt yields more than 8.2%, comparable US treasuries fetch less than 2%. Stocks that fell 37% in US dollar terms last year appear attractive compared to developed nations as growth may return once the RBI cuts interest rates.
Raising import duty on gold to 2% of value from 300 per 10 grams, and that of silver to 6% of value from 1,500 per kg could slow imports thus reducing dollar demand and strengthening the rupee.
Gold is the second-biggest commodity import after crude oil with imports of 878 tonnes in 2011 for around $35 billion.
Source : economictimes.indiatimes.com