Rupee Has Biggest Quarterly Gain Since ’12 as Economy Improves

India’s rupee completed its biggest quarterly advance since September 2012 as foreign investors boosted purchases of the nation’s assets on optimism a new government will hasten an economic recovery.

Inflation eased in February and authorities forecast economic growth will pick up from a decade-low and deficits will shrink in the fiscal year ending March 31. Foreign funds have pumped $9.3 billion into Indian shares and bonds this year, the most among eight Asian markets tracked by Bloomberg, as opinion polls show the main opposition party winning the most seats in elections starting next month while falling short of a majority.

The rupee gained 3.2 percent since Dec. 31 to 59.89 per dollar in Mumbai, prices from local banks compiled by Bloomberg show. The currency rose 0.7 percent today and touched 59.6850, the strongest since July 30. It has rebounded 15 percent from a record low in August. Local currency and bond markets are shut March 31 for a public holiday.

“It’s been a good quarter for the rupee as economic fundamentals have improved,” said Andy Ji, a strategist at Commonwealth Bank of Australia in Singapore. “I don’t see the currency gaining much more before the elections as there’s uncertainty if the polls will deliver a clear mandate to either party.”

The Bharatiya Janata Party is on course to win 195 of 543 seats in the lower house of parliament, according to an opinion poll released March 14 by NDTV television network and Hansa Research. The Congress party, in power for a decade, may get 106 seats, its worst-ever performance, the survey indicated.

Monetary Policy

Narendra Modi, the BJP’s prime ministerial candidate, is campaigning on the basis of his 13-year role as chief minister of Gujarat, a state that has outpaced the national economic growth rate for the last six fiscal years.

The rupee’s advance is partially attributable to the “credibility and transparency” brought to monetary policy by Reserve Bank of India Governor Raghuram Rajan, who took office in September, according to Commonwealth Bank’s Ji. Rajan, a former International Monetary Fund chief economist who’s credited with presaging the 2008 global financial crisis, has raised borrowing costs three times to contain price pressures.

He will keep the benchmark repurchase rate unchanged at 8 percent at an April 1 review, according to 34 of 36 economists in a Bloomberg survey. Two see an increase to 8.25 percent. The government will start the new fiscal year with a cash surplus of 1 trillion rupees and will borrow 3.68 trillion rupees of its 5.97 trillion rupee target by the end of September, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi today.

Bond Yield

The yield on the 8.83 percent government bonds due November 2023 fell two basis points this quarter and one basis point today to 8.80 percent, according to the central bank’s trading system.

Consumer-price inflation eased to a two-year low in February and wholesale-price gains slowed to the least in nine months, official data show. The current-account deficit will be kept below $40 billion this fiscal year, compared with a record $88 billion in the previous 12 months, and the budget deficit will narrow to 4.6 percent of gross domestic product from 4.9 percent, according to Finance Minister Palaniappan Chidambaram.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell 120 basis points this quarter to 9 percent. It rose 1 basis point, or 0.01 percentage point, today.

Three-month offshore non-deliverable forwards advanced 3.6 percent since Dec. 31 to 60.86 per dollar. They strengthened 0.7 percent today. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Before it's here, it's on the Bloomberg Terminal.