Raghuram Rajan's recent surprise rate cut was what central bankers call an "insurance move." In a highly uncertain and deflationary world, the Reserve Bank of India governor decided he'd rather risk higher inflation in hopes of boosting growth. More quietly, Rajan is taking out another policy that could pay even bigger dividends in years to come. He's hoarding dollars.

On Friday, the day before Barack Obama flew to New Delhi for his lovefest with Prime Minister Narendra Modi, the RBI announced that India's foreign-exchange reserves had risen to a record $322 billion. While the news couldn't compete with the Modi-Obama hug at the airport, a nuclear deal and talk of cooperation on climate change, that swelling stash greatly increases the odds that Modi's reform program will succeed.

Rajan's shock rate move on Jan. 15 was itself a boost to so-called Modinomics. By slashing the benchmark rate to 7.75 percent from 8 percent, the RBI governor made clear the central bank was ready to guard India's economy against a fast-mounting number of risks around globe. Equally important, says Marc Chandler of Brown Brothers Harriman, was the "vote of confidence" the decision signaled about Modi's government.

Now Rajan's stockpiling of currencies should help catalyze change in New Delhi. As recently as September 2013, when Rajan started at the RBI, India was spiraling toward crisis. An economy once celebrated as one of the superpowers of the future -- Brazil, Russia, India and China, or the BRICs -- was being grouped among the world's most "fragile" nations. Hedge funds bet India would be the first of the BRICs to be downgraded to junk.

Rajan moved fast to halt a run on the rupee, shore up the banking system and cap inflation. More recently, he's been building up India's defenses as emerging nations brace for Federal Reserve rate hikes and a new euro crisis. Nizam Idris, a Macquarie Group strategist, reckons that Rajan has stockpiled about $59 billion of reserves since taking charge at the RBI, or an average of $4 billion per month. While India's reserves are still a fraction of China's $3.8 trillion, they're substantial enough now to "create a stronger firewall against external account shocks and build greater international confidence," says Rajiv Biswas of IHS Global Insight.

India represents something of an outlier in the region. While Asian peers devalue to boost exports, Rajan has clearly decided that a stable, strong rupee is the key to cementing trust in India's economy, which still suffers from a sizable current-account deficit and relies on short-term capital flows. A firm currency should attract overseas capital to support equities, upgrade infrastructure and pay down government debt. 

David Fuller's view

India is benefitting from the combination of a strong, sensible governor in Raghuram Rajan at the Reserve Bank of India, plus the economically savvy and charismatic Narendra Modi as prime minister.  Moreover, Modi is able to lead because he has a rare working majority in India’s complex democracy. 

This combination receives plenty of international goodwill, not least from Japan and the USA, which want to see a successful Indian economy as a partial counterweight to China’s considerable regional influence. 

Up eight days in a row, India’s Sensex (daily, weekly & monthly) is short-term overbought on stochastics and somewhat overextended relative to its 200-day MA.  It is also approaching a major roundophobia level at 30,000.  Therefore we should not be surprised to see another pullback and consolidation before long.  Meanwhile rising lows have continued to reaffirm underlying demand.  When this sequence is eventually broken, a lengthier reaction and consolidation will have commenced.

Meanwhile, the monthly semi-log chart above shows India’s Sensex strength in perspective – nearly seven years were completed before the 2008 high was decisively cleared.  My guess is that we will see 40,000 before we see 20,000 again, if we ever see that lower level again.  India’s Bombay Banks Index continues to provide a positive lead, albeit currently overextended relative to the MA.  This semi-log scale chart shows the move in better perspective.  Lastly, this chart of the Indian Rupee against 1 USD shows that INR has been a strong currency since Rajan became the central banker.