India's rupee climbed to a three- month high on speculation accelerating capital flows into the local stock market will offset the nation's record current- account deficit.

The currency appreciated in each of the last three weeks as foreigners bought $2.6 billion more Indian equities than they sold this month, exceeding the $2.4 billion the stock exchange recorded for the whole of August. Asia's third-largest economy expanded 8.8 percent last quarter, the fastest pace since 2007, a government report showed Aug. 31.

"Capital inflows may surprise on the upside as India's economic prospects remain positive," said Priyanka Chakravarty, a Mumbai-based foreign-exchange strategist at Standard Chartered Plc. "The rupee is poised to extend recent gains as sustained portfolio investments may overwhelm trade deficit concerns."

The rupee strengthened 0.4 percent to 45.655 per dollar as of 10:14 a.m. in Mumbai, building on a 1.4 percent advance last week, according to data compiled by Bloomberg. The currency today touched 45.595, the strongest level since June 21. It has climbed 3.1 percent this month, a performance second only to South Korea's won among Asian currencies.

Offshore forwards indicated the rupee will trade at 46.15 to the dollar in three months, compared with expectations of 46.43 at the end of last week. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Eoin Treacy's view It has often been our experience, giving interviews to Indian financial TV channels, that there is a reluctance to accept the reality that many foreign investors regard India as one of the best long-term investment destinations. This is often manifested in questions centring on when we think foreign direct investment will be withdrawn when rather the opposite is occurring. Foreign capital is increasingly been attracted to India and provided the trajectory of reform, albeit starting from a low base, remains positive this is likely to continue.

The Dollar has all the signs of being in a lengthy topping out process against the Rupee and has been ranging mostly between R43 and R50 since 1999. The Dollar hit at least a medium-term peak in March 2009 and trended lower until April when it rallied to break the progression of lower rally highs. It hit a near-term peak in May and has posted a succession of lower rally highs within its subsequent four-month range. The Dollar is now testing the lower side of the R45.50 - R47.75 congestion area and is somewhat oversold in the short-term. A clear upward dynamic would be required to confirm support in this area while a sustained move above R47 would be needed to indicate a return to Dollar dominance.

The Indian government bond market suggests that inflation remains a concern for investors but with interest rates rising, a stronger currency and a reasonably good monsoon, price pressures, particularly year over year, should start to ameliorate in the not too distant future.

The Sensex shares the common theme of outperformance among consumer, healthcare and banking sectors with some of its better performing ASEAN neighbours and is currently engaged in an impressive catch-up move. It is quickly closing in on the 2008 peak but a downward dynamic would be required to check momentum beyond a brief pause.