News: Overseas investors to return to India?

(Bloomberg 06/06/2006) Mumbai - India's rupee rose for a third day on optimism global investors, who have been net sellers of the country's stocks for the past three weeks, will buy back shares given the pace of growth in Asia's fourth-biggest economy.

The rupee also gained as some traders sold dollars following a drop in the US currency against the yen and the euro. Traders may have judged the rupee's 3.1 per cent decline versus the dollar in May as excessive after a report last week showed India's economy was expanding at a rate second only to China among the world's 20 biggest countries.

``As we see dollar supplies improving, we can see the rupee gathering more strength following its recent fall,'' said B.

Satyanarayana Rao, a currency trader at state-owned Andhra Bank in Mumbai. ``The dollar's weakness overseas has also resulted in some benefit for the rupee.''

The rupee gained as much as 0.3 per cent to 45.78 against the dollar before trading at 45.8625 as of 3:27 p.m. in Mumbai, according to foreign-exchange Broker Kanji Pitamber & Co.

It may advance to 45.50 in coming days, Rao said.

India's economy grew 9.3 per cent in the three months ended March 31, the Central Statistical Organisation said May 31, rounding off growth of 8.4 per cent during the financial year ending March.

Overseas investors sold $2.66 billion of stocks between May 11 and June 1, more than half the $5 billion they purchased from the start of the year to May 10, according to the stock market regulator, Securities and Exchange Board of India.

Opportunity

The benchmark Sensitive Index, or Sensex, dropped 19 per cent since closing at a record high on May 10, along with a decline in emerging markets worldwide. The 30-stock index rose 95 per cent in the 12 months to May 10.

``Even with very high valuations, we are consistent with the scale of the growth story,'' said Christopher Wood, an equity strategist for CLSA Ltd. in Hong Kong. Investors should seize the opportunity to buy shares in one of the world's fastest growing economies, he said.

The rupee pared gains on concern a widening current-account deficit will boost demand for dollars. Stock purchases by global funds helped offset almost four-fifths of the deficit during the past two years, according to UBS AG.

Faster economic growth has increased demand for imports, including oil, boosting the need for foreign currency.

Spectacular Growth

``The spectacular growth in equity inflows concealed the true magnitude of the problem with the current account,'' said Siddharth Mathur, a currency strategist in Mumbai with J P Morgan Chase & Co., who expects the rupee to fall to 47.50 against the dollar by the end of the year.

The current account, a broad measure of trade that includes services, tourism flows, employee remittances and investment income, is used by many traders and strategists to determine the underlying strength of a currency. The wider the gap, the weaker the currency may get.

The rupee also advanced after the US dollar snapped a two-week rally against the yen and the euro, as signs of slowing growth cut expectations the Federal Reserve will lift interest rates for a 17th straight time this month.

``As the dollar gets weaker, we can see more strength in the rupee,'' Andhra Bank's Rao said.