Rupee Expected to Rise 48-50 Range against Dollar by 2013

International investment in India’s bonds will rise this year as policy makers rein in inflation, boosting the rupee after 2011’s 16 percent slump, according to the most-accurate forecasters for the currency.

The rupee will strengthen 4 percent to 51 per dollar by the end of 2012, according to ING Vysya Bank Ltd., the local unit of the biggest Dutch financial services company and the most-accurate forecaster as measured by Bloomberg Rankings in the six quarters through December. The currency will gain 5.1 percent to 50.50, according to Oversea-Chinese Banking Corp., which ranked second.

International investors boosted their ownership of rupee-denominated notes by $1.6 billion this month to $27.7 billion after government data showed food prices fell for the first time on record in the week ended Dec. 24. The 8.20 percent yield on the nation’s 10-year securities is more than four times that on U.S. Treasuries (USGG10YR) and almost five percentage points more than similar-maturity Chinese debt.

Global funds bolstered holdings of India’s bonds by $3.9 billion last month, the biggest increase on record, as the central bank said in a statement on Dec. 16 that policy makers’ are likely to reverse the monetary policy cycle” to support growth after seven interest-rate increases in 2011. The inflows have contributed to a 1.6 percent advance in the rupee this month, the best performance among Asia’s 10 most-traded currencies.

Estimated Returns

The rupee, which gained 0.4 percent to 52.33 per dollar on 9 January in Mumbai, will end 2012 at 50. The currency will return 15 percent, including interest, the strategists predict. That compares with estimated total returns of 18 percent on Brazil’s real, 10 percent on Russia’s rouble and 4.1 percent for China’s yuan.

India’s benchmark government bonds have rallied this year, after slumping in 2011, on speculation inflation is slowing in Asia’s third-biggest economy. Wholesale prices rose 7.40 percent in December from a year earlier, the least in two years, according to the median forecast of 15 economists in a survey before government data due on Jan. 16.

Default Swaps

India’s benchmark Sensitive Index (SENSEX) of shares has gained this year on speculation policy makers will reduce borrowing costs. The index, which slid 25 percent in 2011, has rallied 2.9 percent in 2012. The Reserve Bank will cut its 8.5 percent benchmark repurchase rate by 150 basis points in 2012, according to Goldman Sachs Group Inc.

Barclays Capital, the third-most accurate rupee forecaster tracked by Bloomberg, predicts the currency will climb 11 percent to 48 by year-end. The rupee will advance 3.2 percent to 51.4 this year, according to Westpac Banking Corp., ranked at the same level as Barclays among Bloomberg’s most-accurate rupee forecasters.