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The Indian rupee strengthened by the most in five months, as the country’s key equities gauges hit a record high and amid a larger-than-expected dividend payout to the government. 

The rupee rose as much as 0.3% to 83.03 against the dollar on Friday, the most since December 15, as markets reopened after being shut on Thursday. 

The Reserve Bank of India’s $25 billion payout to the government, which is almost double than what was budgeted, is also boosting sentiment as the funds could be used to finance more spending. Stocks climbed as foreigners pared pessimistic bets amid hopes for policy continuity after the ongoing elections.

“The rupee rose as sentiment toward stocks turned positive, with the dividend helping the macro outlook,” said Dilip Parmar, currency strategist at HDFC Securities. “Markets have a more positive outlook on political stability in the country.”

Traders are testing the Reserve Bank of India’s resolve to curb swings in the currency, as the rupee has been among the least volatile in the world in recent months. Sentiment for Indian assets is improving with as much as $40 billion in inflows expected from the inclusion of the nation’s bonds in the JPMorgan Chase & Co.’s flagship emerging-market index from June.

Read: Goldman Sees India Bond Inclusion Spurring $40 Billion Inflows

Rising foreign-exchange reserves are also supporting the rupee. India’s dollar stockpile rose to a record-high $648.7 billion as of May 17, according to data released Friday.

“Rupee momentum is based on two factors: better fiscal profile for India and the RBI dividend which is good for the economy if it gets spent out one way or another,” said Madhavi Arora, economist at Emkay Global Financial Services in Mumbai. “India exceptionalism vs emerging-market peers is playing out in the short term. But RBI will not let it appreciate too far beyond EM Asia peers.”

--With assistance from Ronojoy Mazumdar.

(Updates throughout and adds analysts’ comments)

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