Rupee Buoyed by India’s Near-Record Reserves: Chart of the Day

India has padded its foreign reserves by 15 percent in 10 months as narrowing deficits lured foreign investment and helped turn the rupee into the world’s best-performing currency.

The CHART OF THE DAY shows India’s international reserve assets including gold jumping $41 billion to $316 billion as of July 4, within 2 percent of the record high in September 2011. The premium on offshore forward contracts for buying the dollar against the rupee in three months has narrowed by two-thirds since August, to 0.76 rupees over the onshore spot rate. In the same period the rupee surged 14.4 percent percent, the world’s biggest gain against the dollar.

“The significant increase in India’s reserves has been an important contributor to the rupee’s stability this year and places the Reserve Bank of India in a better position to manage foreign-exchange volatility,” said Hamish Pepper, a Singapore-based strategist at Barclays Plc. “The rupee is set for modest appreciation over the coming months, helped by a marked reduction in India’s current-account and fiscal deficits.”

India’s asset stockpile including gold climbed as improving external and public finances prompted global funds to pump more than $23 billion into local stocks and bonds in 2014, exchange data show. The added reserves have strengthened the RBI’s arsenal against volatile capital flows ahead of forecast increases in U.S. interest rates. The rupee’s three-month implied volatility, a gauge of expected swings used to price options, has fallen to a three-year low of 7.3 percent.

The current-account shortfall shrank to $32.4 billion in the fiscal year to March 31 from an unprecedented $88 billion in the previous period, with a ruling to curb gold imports being a key reason. Finance Minister Arun Jaitley, who took office in May, is seeking to reduce the fiscal deficit to 4.1 percent of gross domestic product this year, which would be the lowest since 2007-2008, according to budget estimates released last week.

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