MUMBAI: The Indian rupee is poised to end the year as the best-performing major emerging market currency versus the US dollar as hopes of economic and political stability drew funds despite a slide in peer currencies such as Russia’s rouble and Brazil’s real on fund flow back to the US expecting higher interest rates.

In contrast to 2013 when the rupee was the worst performer sliding about 12.36 per cent (according to ETIG data), the currency is down less than a percentage this year as foreign funds invested Rs 2.62 lakh crore or around $42 billion in equity and debt, data from the Securities and Exchange Board of India ( Sebi ) showed. The Russian rouble has tumbled 44 per cent and Brazil real is down 11 per cent. The tightlycontrolled Chinese yuan declined 2.2 per cent.

India remained an oasis of currency market stability when almost every currency fell against the greenback. In fact, the rupee might even have appreciated versus the US dollar because of the fund flow, but the Reserve Bank of India’s (RBI) constant purchase of US dollars held back gains. In cross currency terms, the rupee has even appreciated which may even threaten the export competitiveness.

The rupee has actually appreciated against most currencies other than USD, said Anindya Das Gupta, managing director at Barclays. For example, EUR/INR has moved from 85.06 last December to 77.56 now. It has just been a huge USD rally globally and we have had material absorption of USD by RBI to extinguish the forward liabilities and shore up reserves.

It was a slide show for currencies across the world as US investors pulled back funds expecting higher interest rates after the Federal Reserve ended its quantitative easing of $85 billion of monthly bond purchases as planned. But the confidence about economic stability with the Reserve Bank of India governor Raghuram Rajan achieving inflation targeting as the cornerstone of monetary policy and Prime Minister Narendra Modi easing clutches on businesses drew in record funds from overseas investors.

Governor Rajan has bought nearly $60 billion from the market between January and October, which has boosted the country’s foreign exchange reserves to $314.7 billion, data from the central bank showed. In the spot market, it bought $17.6 billion and in the forwards, it was $42 billion. The rupee did not appreciate as RBI is intervening in the currency market mostly through buying dollars, said Abhishek Goenka, founder & CEO, India Forex Advisors. It would not want the rupee to be inflated artificially.

The central bank had to aggressively purchase the US dollars since not doing so would have flooded the local money market with cash which would have pushed down the interest rates which the central bank is ranged against. RBI as part of its inflation targeting is keeping the money market tight which includes selling of government bonds from its kitty and absorbing the liquidity. Its reverse repos, where it takes cash out of the banking system, have also increased.

The rupee and some Asian currencies such as Indonesian rupiah may continue to be better off than others because of expectations of reforms and the continued carry trade opportunity these markets provide.

Even if the US interest rates rise, the European Central Bank and the Bank of Japan may keep rates low and flood the market with easy money. This money might replace the US dollar in carry trades. In fact, some believe that even the US might not raise rates because of deflationary fears due to tumbling oil prices which are down 40 per cent.

This combination of factors has supported the USD rally and with these conditions likely to remain in place through 2015, it implies that USD-Asia will stay elevated in 2015, said an HSBC report. There is an argument that loose monetary policies by the BoJ and the ECB will keep global core interest rates low, funding carry trades and inflows into Asia. Indeed, Asian currencies have outperformed the EUR and the JPY since policies were loosened during second half.