The currency, Asia's best performer this month, has rallied 4.8 percent since Dec. 31 as a thumping win for Prime Minister Narendra Modi's party in state elections boosted bets for continuation of the government's reforms agenda. The Federal Reserve's dovish tone on future rate hikes, that's contributed to a weaker dollar, also burnished the allure of assets in emerging markets.
"Change in sentiment toward India after the recent state elections and high real rates have attracted large portfolio flows into equity and debt," said Gopikrishnan MS, Mumbai-based head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc. "Market action indicates that the Reserve Bank of India has been intervening and we think they could continue to do so if the flows continue."
Foreign holdings of rupee-denominated government and corporate bonds climbed by 359.4 billion rupees ($5.5 billion) this quarter, with 272 billion rupees coming in March alone, the most for any month in Bloomberg-compiled National Securities Depository Ltd.'s data going back to mid-2011. Overseas funds have poured $6.1 billion into Indian stocks since the year-end, of which $4.5 billion has come this month.
The rupee climbed 0.2 percent to 64.8175 per dollar in Mumbai Friday, taking its gain this month to 2.9 percent. The three-month advance is the biggest for any quarter since the period ended September 2012. The S&P BSE Sensex of shares has rallied 11 percent this year, set for the best quarter since the period ended June 2014.
Yields on local sovereign bonds, among the highest in Asia, are another reason for foreign investors to flock to India. The 10-year yield jumped 46 basis points last month, the most since July 2013, after policy makers unexpectedly signaled an end to its monetary easing cycle. It has fallen 20 basis points this month, helped by the inflows.
At 6.68 percent on Friday, India's 10-year government notes pay 426 basis points more than similar-maturity U.S. Treasuries.
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