Indian Rupee Gains for a Second Day

India's rupee rose for a second day on speculation the nation's economic growth and rallying stock market will attract more investment from abroad.

The currency headed for its fourth quarterly gain as overseas investment in local equities more than doubled in the week through June 27 from the previous five days. The rupee also advanced on speculation banks will buy it to increase their local-currency holdings as money market rates increase.

``Capital inflows continue to be strong, providing support to the rupee,'' said V. Rajagopal, chief currency trader at Kotak Mahindra Bank Ltd. in Mumbai. ``Money is coming in various forms such as stock market inflows, export earnings, corporate borrowings and direct investment.''

The rupee rose 0.2 percent to 40.765 against the dollar and has gained 6.7 percent this quarter, the best performance among 10 of the most traded Asian currencies.

Global funds bought an average $71 million more stocks each day than they sold in the week ended June 27, compared with $35 million the previous week, according to the Securities and Exchange Board of India. They invested $402.5 million on June 21, the most in a day since this fiscal year began April 1.

Indian companies are borrowing more abroad to benefit from lower U.S. dollar interest rates. Overseas borrowing by local firms increased 59 percent to $5.1 billion in March from the previous month, according to the central bank. The benchmark rate for companies borrowing in the U.K. is more than 3 percentage points lower than the comparable Indian rate.

Monthly inflows of direct investment averaged $1.3 billion in the fiscal year ended March 31, compared with $461.7 million in the previous year, according to government data.

The rupee also rose on speculation banks exchanged dollars to meet cash requirements after the overnight borrowing rate rose to the highest in six weeks. Indian lenders have to set aside cash equivalent to 6.5 percent of deposits as reserves.

``The call money rate is tight and that also may be prompting some unwinding of dollar positions,'' Kotak's Rajagopal said.

The overnight money market rate rose for a fifth day to as high as 9.13 percent today, the most since April 27. It climbed after companies paid quarterly taxes and the government increased debt sales, draining spare cash in the system. The government sold bonds and treasury bills worth a total 550 billion rupees ($13.5 billion) this month, compared with 445 billion rupees last month.

The shortage of funds spurred lenders yesterday to borrow from the central bank for the first time since May 25 to raise cash. Banks borrowed a net 95 billion rupees from the Reserve Bank yesterday via its daily repurchase agreement auctions.