RTTNews - Monday, the Indian rupee appreciated 3% against the dollar to its highest level in nearly 5-months against the dollar as the ruling coalition won a clear victory in the general elections, boosting hopes for reforms and foreign investment in India.

The Indian currency jumped after Prime Minister ManMohan Singh's Congress party and its allies won 260 of the 541 seats in the lower house of India's parliament, exceeding the most optimistic prediction for 216 in exit polls. The wide margin by which Singh won will enable him to form a stable government that need not depend on communists or regional parties.

The Congress has already nominated Manmohan Singh, the incumbent prime minister for the top post. Manmohan Singh becomes the first prime minister after Jawaharlal Nehru to be nominated for a second term after completing a full term in office.

Prime Minister ManMohan Singh's electoral victory, the biggest any Indian politician has scored in two decades, may loosen political shackles that have restrained the country's economic growth as it struggles to free half a billion people from poverty.

Congress leaders will meet tomorrow to officially endorse Manmohan Singh as prime minister, after which the party will meet its coalition partners to decide potential new allies.

The government will also have a strong mandate to deal with security issues in a region overshadowed by instability in Pakistan and Afghanistan.

A strong Congress-led coalition, free of pressures from its former communist partners, has boosted the prospect of reforms to encourage growth in Asia's third largest economy.

The confidence reflected on India's main stock index, which rose 10 percent as trading opened today, triggering circuit breakers that halted trade for two hours as investors celebrated an election victory for the ruling coalition.

When the markets re-opened at 11:55 am IST, the BSE Sensex extended gains to 17.24 percent. So trading in both the Bombay and the National Stock Exchange was suspended for the rest of the day. The BSE Sensex was locked at 14,273, up 2,099 points or 17.24% and the S&P CNX Nifty rose 636 points or 17.33% to 4,308 before closing for the day.

Following a jump in stock markets, the Indian currency rose 3% to hit as high as 47.7550 against the dollar. This set the highest point for the rupee since December 26. If the Indian currency advances further, it may test resistance around the 46.7 level.

In 2008, the rupee fell 19 percent in its biggest yearly fall since the balance of payments crisis in the early 1990s, as the global financial crisis triggered capital outflows.

The Indian rupee extended its downtrend and tumbled to a record low of 52.56 against the dollar on March 03, 2009 as deteriorating world growth prompted foreign investors step up sales of local stocks, driving the rupee to a record low.

However, the Indian currency reversed direction thereafter as the world central banks slashed interest rates further and announced various stimulus measures to help revive economies suffering from declining demand for exports as the global recession deepens.

To provide fiscal support to the Indian economy, Prime Minister Manmohan Singh's government has cut taxes and increased spending on roads, ports and other infrastructure. Acting Finance Minister Pranab Mukherjee slashed excise duty across the board to 8 percent from 10 percent and the service tax to 10 percent from 12 percent, besides extending a 4-percentage point cut in the central value-added tax announced in December beyond March 31.

The combined stimulus from interest-rate cuts, increased government outlays and lower taxes totals almost $80 billion, or 7 percent of India's gross domestic product, according to the central bank.

The Reserve Bank of India has slashed benchmark rates six times since mid-October to help the nation's economy counter the impact of a global recession. The bank last cut its benchmark repurchase and reverse-repurchase rates on April 21 to 4.75 percent and 3.25 percent respectively, the lowest levels since the two rates were introduced in 2000.

The rupee has gained around 9% against the dollar since reaching a record low in March. The rupee has also benefited from a revival in foreign investment into the stock market. Foreign funds have been net buyers of about $4 billion of shares since mid-March.

Political stability will make India a more attractive investment destination as Prime Minister seeks funds to stimulate Asia's third-largest economy. It may also encourage President Barack Obama and his administration to seek greater cooperation in the fight against rising militancy in neighboring Pakistan and Afghanistan.

The U.S. wants Indian help in its fight against Islamic militancy in the region, especially Pakistan. Singh stalled a peace process with India's nuclear-armed neighbor following terrorist attacks in Mumbai that killed 166 people in November.

The U.S. recognizes the significance of the election for the people of India, the White House said in a statement May 16. President Obama looks forward to continuing to work with the Indian government to enhance the warm partnership between our two countries.

The election victory has raised expectations that the government could sell stakes in state-run firms to help fund a widening fiscal deficit and ease the pressure on market borrowing.

In its interim budget in February, the government announced a record borrowing of 3.62 trillion rupees ($75 billion) for 2009/10. A revised budget is due by the end of June.

The incoming government will need to bolster an economy that's growing at the slowest pace in seven years as the global recession saps demands for Indian goods. Industrial output fell by the most in 16 years in March as exports plunged by a record.

Asia's third-biggest economy expanded 5.3 percent in the quarter through December 31, the slowest pace since 2003, while factory output in March shrank the most in 16 years.

Kamal Nath, a Congress lawmaker and India's trade and industry minister, said last week that the government will continue its focus on stimulating the rural economy as a means to spur growth.

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