Nov. 1 (Bloomberg) -- India's exports of gems, textiles and other manufactured products rose at the fastest pace in five months in September as exporters coped with a record surge in the rupee against the dollar by switching markets and currencies.

``Indian exporters are diversifying their markets and many may have shifted their billings to other currencies to overcome the impact of rupee appreciation,'' said D.H. Pai Panandiker, president of the RPG Foundation, an economic policy group based in New Delhi. ``Exporters are also becoming more competitive.''

Exports rose 19.2 percent to $12.8 billion, while imports rose 2.3 percent to $17.2 billion, narrowing the trade deficit to $4.42 billion from $6.09 billion a year earlier, the Ministry of Commerce and Industry said today in a release in New Delhi.

Faster exports will help Prime Minister Manmohan Singh's government boost industrial growth to the 10 percent pace it says is required to spur economic expansion to more than 9 percent each year as part of efforts to generate more jobs and eradicate poverty in the world's most populous nation after China.

The local currency has climbed almost 13 percent to a 9 1/2- year high against the dollar this year and is the best performer in Asia, according to data compiled by Bloomberg. The rupee, which rose 2.6 percent in September, has surged as overseas investors, enticed by record economic growth, purchased shares.

The surge of capital inflows, which has driven up the rupee, will still need to be dealt with by policy makers. A strengthening currency erodes the value of merchandise exports, which make up about 15 percent of the $906 billion economy, Asia's third largest after Japan and China.

Capital Flows

``In a scenario where capital flows are far in excess, exchange-rate management is more to deal with problems of plenty,'' said Shubhada M. Rao, chief economist at Yes Bank Ltd. in Mumbai. Still, September's ``export numbers have come as a bit of a positive surprise.''

Exports in the six months ended Sept. 30 rose 18.5 percent to $72.3 billion, while imports rose 25.5 percent to $109 billion in the period, widening the trade deficit 42 percent to $37 billion from $26 billion a year earlier.

``I hope that the target we had set we will achieve,'' Trade Minister Kamal Nath told reporters today. ``We are not revising the target. The cabinet will be considering further measures for exporters like remissions, refunds of taxes and levies.''

India's trade ministry is working on a plan to extend additional tax breaks to exporters to help them cope with the losses arising from the currency gain. The government last month announced subsidized loans and tax breaks to exporters for the second time this year to help industries such as jute, cashew nuts and coffee to protect their earnings.

Trade Figures

Non-oil imports in the April-September period rose 34 percent to $77.8 billion, while oil imports gained 8.3 percent to $31.4 billion, today's report said.

Oil imports rose 8 percent to $5.5 billion in September, while non-oil imports fell 0.2 percent to $11.7 billion. The decline was because of the weak dollar, Nath said. The trade figures for the month aren't reflective of any slowdown, he said.

Overseas flows have pushed the Bombay Stock Exchange's Sensitive Index to a record, with the benchmark this week climbing above 20,000 for the first time. Global investors have bought $18.9 billion of stocks and bonds this year, higher than the previous record of $9.46 billion in 2005.

India's central bank on Oct. 30 raised the cash reserve ratio, or the ratio of deposits that lenders must put aside, by half a percentage point to 7.5 percent to prevent overseas inflows from fanning inflation. The change takes effect Nov. 10.

Reserve Bank of India Governor Yaga Venugopal Reddy is also getting help in checking unprecedented foreign investment from the nation's stock market regulator. The Securities and Exchange Board of India on Oct. 25 barred issuance of offshore instruments tied to derivatives.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

Last Updated: November 1, 2007 07:36 EDT