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Rupee Completes Best Month in a Year on Capital Inflow Optimism

India’s rupee capped its best month in a year after the central bank took steps to boost dollar supply and the U.S. maintained stimulus that’s buoyed emerging markets.

The Indian currency has rebounded 10 percent from a record low of 68.845 per dollar touched Aug. 28 after the Federal Reserve said Sept. 18 it will continue $85 billion a month of bond purchases. Reserve Bank of India Governor Raghuram Rajan allowed local banks this month to borrow more from abroad and offered to swap the funds, along with foreign-currency deposits raised from citizens living abroad, at concessional rates.

“We don’t think the Fed will taper until March of next year, so that opens up a window for the market where liquidity is ample,” said Mirza Baig, head of currency and interest-rate strategy in Singapore at BNP Paribas SA. The bank recommends buying the rupee, saying “sentiment has turned” in its favor since Rajan took charge of the RBI on Sept. 4.

The rupee advanced 4.9 percent this month to 62.6175 per dollar, according to prices from local banks compiled by Bloomberg. That’s the best performance among 11 most-traded Asian currencies, and pares the quarterly loss to 5.2 percent. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, sank 529 basis points, or 5.29 percentage points, in September to 15.44 percent. That’s the biggest drop since January 2009.

U.S. Budget

The rupee fell 0.2 percent in Mumbai today amid a U.S. budget stalemate that raises the risk of the first government shutdown in 17 years. Italy’s government is on the verge of collapse after allies of former leader Silvio Berlusconi said they’d quit the cabinet.

India’s current-account deficit widened to $21.77 billion in the three months through June from $18.08 billion the previous quarter, official data released at the close of markets today showed. The median estimate in a Bloomberg survey was $23 billion.

One-month onshore rupee forwards fell 0.3 percent from Sept. 27 to 64.14 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts rose 0.5 percent to 63.32. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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