India's battered rupee (Exchange:INR=) was the best performing global currency last month amid growing confidence that a currency crisis would be contained and as fears about the Federal Reserve tapering its quantitative easing program ebbed.
The rupee rose about 9 percent against the U.S. dollar in September, also outperforming major global currencies. The rise marks a surprising comeback after the rupee sank to a record low just shy of 70 per dollar in late August, earning it the title of the world's worst performing currency this year.
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Worries about a wide current-account deficit, weak economic growth and disappointment at the slow pace of economic reforms all conspired against the currency at the time. Economic growth in India, Asia's third largest economy, for instance has eased to below 5 percent from a double-digit pace in 2010.
Analysts say that while the rupee is not out of the woods yet, the currency does appear to have stabilized from the sharp sell-off.
"The Reserve Bank of India's (RBI) new governor has been pro-active about supporting the rupee," said Kelly Teoh, market strategist at trading firm IG (London Stock Exchange: IGG-GB) in Singapore, giving a reason for the rupee's rebound.
"The delay in Fed tapering is also helping and if that continues, we should see the rupee continue along this upward path," she said, adding that the rupee might rebound to the 58-59 per dollar area in the months ahead.
Fears about an unwinding in the U.S. monetary stimulus that pumped liquidity into financial markets in the wake of the global financial crisis have battered emerging markets in recent months. However, a surprise decision by the Federal Reserve not to start tapering its $85 billion-a-month asset-purchase program in September has given knocked-down assets a reprieve.
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The rupee traded at about 61.94 per dollar late on Tuesday, up almost 10 percent from a record low set in August.
It's down about 12 percent in year-to-date and remains one of the world's worst performing major currencies. Still compare that to August - when the currency was down some 25 percent for the year, fueling worries that a sell-off in the currency might be spiraling out of control.
Since then, Raghuram Rajan, who took over as RBI Governor in early September, has helped shore up confidence. In one of his first actions as central bank chief, Rajan unveiled steps to liberalize financial markets and the banking system.
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On Monday, the RBI cut a key overnight interest rate as it unwound emergency measures imposed in mid-July to defend the battered rupee.
"In our view, the RBI will continue with the unwinding of the currency stabilization measures," Leif Lybecker Eskesen, HSBC (London Stock Exchange: HSBA-GB)'s Chief Economist for India and ASEAN, said in a note.
Mitul Kotecha, head of global currency research at Credit Agricole (Euronext Paris: ACA-FR), said he expected the rupee to "consolidate" around the 61 to 62 per dollar area, adding that while the outlook for the currency has improved there were still hurdles ahead.
"There has been improved sentiment since the new RBI Governor was appointed, but there are still structural issues in India and if risk aversion picks up again then the rupee could come under pressure again," he said.
On Tuesday, the International Monetary Fund revised down its growth forecasts for India. It expects India's economy to grow 3.8 percent this year, compared with a previous forecast of 5.6 percent.
-By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC
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