The Indian rupee emerged from its biggest slump in nearly three months as the market exuded optimism that investment flows will trickle in despite the fact that the U.S. is scaling back its stimulus program.
Asia’s third-biggest economy also shows signs that inflation is easing, while factory activity is increasing. Unlike most other economies, India is shielded from China’s economic slowdown.
Federal Reserve Chair Janet Yellen said on March 19 that the government will wind down its bond-purchase program, which will be followed by an increase in interest rates in six month. So farm in this month alone, foreign inflows have sunk $3 billion into Indian bonds and stocks.
“India is seeing inflows as inflation goes down and boosts real yields,” said Jonathan Cavenagh, a Singapore-based analyst at Westpac Banking Corp. “There is also strong optimism before the elections and all of that provides a good flow backdrop.”
The rupee surged 0.7 percent on Friday to stand at 60.9250 against the dollar. This is after it plummeted sharply on Thursday by 0.6 percent, its largest drop so far since January 27. However, the rupee has increased 0.4 percent this week, outperforming other Asian currencies such as Taiwan dollar, won and ringgit, which have plunged.
Exchange data shows that foreign inflows purchased a net $1.6 billion of Indian bonds, denominated in rupee, and $1.1 billion of stocks. Inflation hit a two-year low last month, while industrial output inched 0.1 percent higher in January after shrinking in December.
The country exported $19 billion of goods to China in 2012, compared with $42 billion to U.S. However, China was the biggest market for other Asian countries such as Taiwan, South Korea and Malaysia.
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