MUMBAI (Sept 3): The Indian rupee climbed to a two-month high on Thursday after massive overseas fundraising through one-off measures far exceeded market expectations, improving the currency's outlook at a time when a renewed US-Iran conflict has pushed crude prices higher and contributed to a global bond selloff.

The rupee opened at 94.30 per dollar, its highest level since late June, after settling at 94.97 on Wednesday. The unit has risen more than 1% this week, making it among the best-performing currencies in Asia.

India attracted a much larger-than-expected US$136.4 billion through special foreign-currency mobilisation measures unveiled in June, the Reserve Bank of India said on Wednesday. Most inflows were through non-resident deposits, with smaller contributions from external commercial and overseas borrowings.

The inflows will further boost India's foreign-exchange reserves, which jumped to a all-time high last month, providing the central bank more dry powder to defend the rupee and absorb oil and other external shocks.

India's inflows "materially strengthen" the RBI’s hand, Kunal Sodhani, head treasury of Shinhan Bank, said.

"The key is that the RBI now has considerably more flexibility to resist both excessive depreciation and excessive appreciation."

The larger dollar cushion leaves the RBI better placed to absorb the pressures from oil prices, which, Sodhani reckons remain the biggest risk for India.

Crude prices have resumed their climb following renewed strikes between the US and Iran, threatening to widen India's trade deficit and add to inflationary pressures in the oil-importing economy. Brent crude has rallied 7% this week, hitting its highest level since late July.

At the same time, expectations that the Federal Reserve could raise interest rates this month have pushed US yields higher and kept the dollar broadly supported. Odds of a Fed rate hike at this month's meeting are now at 2-in-3.

The 10-year U.S. Treasury yield is hovering near its highest level in almost three years.

India's FX reserves are already at a record US$729.3 billion and are expected to rise further. Meanwhile, the RBI's forward book, at an all-time high of US$137 billion, is also expected to grow.

The jump in the RBI’s FX reserves offers it ample firepower, notwithstanding the rise in its forward book, Nomura said in a note.

Nomura estimates India's balance of payments will be in a surplus of about US$66 billion in the current fiscal year, against a deficit of US$23.6 billion in the previous year.

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