MUMBAI (AFP) - India's currency hit its strongest level in 2014 on Tuesday as hopes grew that a stable and business-friendly government would soon be elected, prompting foreign money to flow into markets.
The currency has gained more than two per cent since the start of the year to reach 60.51 rupees (S$1.26) against the dollar, a position last seen in mid-August last year.
The rupee later that month sank to a record low of 68.85 amid a fiscal deficit crisis and waning investor confidence as the government struggled to boost growth in the face of global economic turmoil.
But a flurry of steps from the government to curtail its expenses, initiate reforms and encourage investments, while clamping down on unproductive imports like gold, have helped restore confidence in India, analysts say.
India's hardline opposition Bharatiya Janata Party (BJP), led by Narendra Modi, which is considered the most business-friendly party, is expected to trounce the scandal-tainted Congress government in elections that begin next month.
"The India story is being bought into by investors. We are seeing a large chunk of outflows from other emerging markets reaching our shores on the expectation of political stability after the elections," Ashtosh Raina, head of currency trading at HDFC Bank, said.
He said the rupee could strengthen to between 57.00 to 58.00 versus the dollar if election results fulfil expectations, while Barclays Bank predicts a pre-election rally in the rupee to push it towards the 59.00 level.
The Bombay Stock Exchange has also benefitted from the optimism of foreign investors with its benchmark index touching an all-time high on Monday.
Data shows that foreign investors have bought $8.51 billion worth of Indian stocks and debt since the start of 2014, more than half of which was bought in March.
Modi, the chief minister of western Gujarat state, has portrayed himself as a pro-business reformer and a champion of economic development who can turn around India's slumping economy.
But the good cheer in India's financial markets could go into reverse swiftly if investors see signs of political instability emerge after the elections, market analysts warned.
"The slightest signs of political uncertainty or likelihood of a business unfriendly party taking charge could cause deep hurt in the market," Raina warned.