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The rupee hit its strongest level in more than a year on Tuesday, as traders welcome the governing Bharatiya Janata Party’s victory in state elections over the weekend.

The currency had depreciated sharply after the government’s surprise demonetisation in November, which made 86 per cent of its banknotes invalid overnight. But it has recovered over the last month, encouraged by positive economic data and a return of foreign investors to Indian debt markets.

Now the BJP’s success in state elections over the weekend has prompted the rupee to strengthen further. The Hindu nationalist party won the biggest majority in bellwether state Uttar Pradesh since Indira Gandhi, affirming the position of prime minister Narendra Modi.

Most emerging market currencies are trading weaker ahead of an expected rate hike in the US tomorrow, but the rupee climbed 0.6 per cent today, building on a 0.56 per cent rise yesterday. The currency hit 65.77 per dollar, its strongest level since November 2015.

India’s benchmark Nifty 50 stock index also hit a record high on Tuesday, the first full day of trading since the election results.

Win Thin, head of emerging markets at Brown Brothers Harriman, said the election result was positive for the rupee as it “suggests that Modi will continue with his reform efforts, and that his standing did not suffer from the November demonetisation”.

Data released this morning also showed an uptick in inflation in the country, lending support to the Reserve Bank of India’s decision to forgo an interest rate rise last month. Year on year wholesale price inflation of 6.55 per cent was higher than economists had predicted. Mr Thin said: “I think the RBI was correct to signal the end of the easing cycle at its February meeting”.

The RBI had been expected to cut rates after the demonetisation moves to help offset any negative impact on growth, a move that would weaken demand for the rupee.

Copyright The Financial Times Limited 2017. All rights reserved.
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