The rupee has jumped 11 per cent this year, strengthening to beyond 40 per dollar for the first time since 1998, as foreign share buying pushed stocks up 20 per  cent to an all-time high. To stem the currency’s gain, the central bank sold rupees worth $21 billion in the first four months of this fiscal year, almost equal to last year’s entire sales, causing money supply to surge.

“We expect RBI to continue to raise the cash reserve ratio to control money-supply growth,” said senior economist at Nomura Tetsuji Sano in Tokyo. The rupee is strengthening as RBI isn’t absorbing fully record dollar inflows from foreign investors.

“Policymakers are clearly not too happy with the rupee falling below 40 for the first time in almost 10 years,” Credit Suisse analysts Nilesh Jasani and Arya Sen said. They also say there is a risk cash reserve ratio will be increased from seven per cent if foreign inflows continue at the pace of the past two days.

Foreign investment
Foreign investors are buying shares and building factories in India to take advantage of Inida’s record growth, that’s second only to China. The government expects FDI to double to $30 billion in the current financial year as companies including Volkswagen AG builds its first factory

Rising foreign investment is fuelling growth in India’s money supply, which increased 20 per cent in the fortnight ended August 31, according to RBI’s latest data, which is more than its 17.5 per cent forecast for the year.

RBI increased the cash reserve ratio, or the proportion of deposits commercial banks need to place with it as reserves, for the third time this year in July to curb lending to consumers and check demand.