(This story originally appeared in on May 17, 2017)

MUMBAI: The rupee may be in for a fresh round of appreciation as it remains the currency offering the best returns for carry trade investors . Those returns coupled with a possible weakening of the dollar across the board may translate into a boon for importers and those with debt denominated in the US currency.The Reserve Bank of India’s stance — traditionally, it won’t try to fix the value of the currency although it will look to reduce volatility— has given comfort to global investors as other central banks like that of Indonesia are said to be intervening heavily in the currency market . Carry trade involves borrowing cheaply to buy currency that will appreciate.The rupee has gained 0.86% against the dollar in the past five trading sessions, closing at 64.08 on Tuesday compared with the previous day’s 64.06.“The rupee has gained on the back of broad dollar weakness while a pro-India sentiment is arising out of perceived policy stability and internal reforms,” said Ashutosh Raina, head of forex dealing at HDFC Bank.“Some market participants are seen building short positions on the dollar, which will gain more ammo with overseas inflows to debt and equities in India amid a positive real interest rate. The rupee is clearly on a rising mode testing a crucial technical level.”As the Narendra Modi government reaches its three-year anniversary, it has earned plaudits for its performance from CEOs, markets and the public, according to polls published by ET on Tuesday, with most expecting that trend to persist with more reforms and increased infrastructure creation.The dollar index, which measures the unit against six other major currencies, has fallen 4.35% since December 28 last year. It is now at 98.811. At 6.67%, India’s 10-year benchmark sovereign bond yield is the highest among major economies in Asia, following Indonesia, Bloomberg data show.The three-month forward premium on the rupee has risen by as much as six paise in the offshore non-deliverable forwards market over the past few trading sessions, dealers said.“Rise in rupee’s forward premium suggests that people have resumed short-selling the dollar against the rupee,” said Anindya Banerjee, currency analyst at Kotak Securities. “The falling dollar index too has added to the rupee’s strength. With softer inflation, India turns out to be a country offering higher real interest rates compared with other emerging markets, a key to attract overseas investment flows.”One of the ways of measuring the real interest rate is the differential between one-year government bond yield and retail inflation, which slowed to a record 2.99% in April, putting the gap at 3.3%. Still, consumer inflation may not remain at such lows in the coming months given there’s less of a baseeffect advantage going forward.Overseas money is pouring into debt securities and that along with masala bond inflows is adding strength to the local unit — the rupee has been testing the key technical 64 level in the past few days.Foreign portfolio investors have collectively invested Rs 1.02 lakh crore in domestic equities and debt securities this calendar year, according to National Securities Depository Ltd data.Among the risks are interest rate increases by the US Federal Reserve as that country’s economy improves.If the Fed goes ahead with further hikes this year, then the tide may turn. “With US Fed raising rates, the scene may change if the dollar appreciates against other major currencies,” Raina said.