The rupee has gained 3% so far in 2014, while its Asian peers barring the Indonesian rupiah which is up 7.6% have all gained less than 1%. The currency ended at 60.07/$ on Thursday, up 3.04% since January on the back of an inflow of $10 billion into shares and bonds.
There is a lot of momentum money coming in, which is betting on everything. The bets on elections are reinforced by the improving economy, said Hitendra Dave, head of global markets, HSBC Bank.
BofA ML expects $25-billion worth of flows into local financial markets, which may help the rupee appreciate to 57-58/$. Kotak Securities and Nomura Holdings, too, predict a similar rise in the rupee.
Positive sentiment from expectations of a favourable election outcome, following a sharp improvement in the CAD situation and increased capital flows through the swap window of the RBI, has put the rupee on an appreciating bias, said Kotak Securities in its note on the currency.
General elections began on April 7 and, so far, polls have been held in 99 constituencies. The elections will be conducted in nine phases and conclude on May 16.
FIIs began buying domestic debt in January, emboldened by high yields and easy hedging costs. During January-March, FIIs pumped $5.5 billion into debt. Flows into equities were slow, but have picked up since March. FIIs have poured $4.6 billion into shares so far in 2014.
While the political outcome could determine the course of the rupee hereafter, all of its gains were not on the back of the elections. A large part of the rise was due to a series of measures kickstarted by the Reserve Bank of India in September 2013 and a gradual improvement in macroeconomic variables since then.
The RBI introduced concessional swap windows in September to lure dollars into the country. The central bank also allowed more flexibility in hedging for both exporters and importers and took the bulk of dollar demand from oil importers away from the market.
The curbs placed on gold imports in 2013, along with an improvement in exports, brought down current account deficit to below 1% in October-December from an unsustainable 4.8% in 2012-13. The country's GDP growth also improved and inflation eased, giving more confidence to investors.