If the health ofIndia's economy has been a cause for concern for some time - and growth has slowed considerably this year - then the rupee's recent sharp decline offers further pause for thought. Yesterday, the currency hit a record low of 63 rupees against the US dollar and there is no sign of the rot stopping any time soon. Analysts predict the currency will suffer further declines in the next few days, despite already shedding more than 50 per cent of its value against the dollar since 2008.
Some of the factors that contribute to an unusual fall in currency values include the loss of investor confidence, panic in foreign exchange markets, economic instability and a weak global economy. P Chidambaram, India's finance minister, believes this last point is most pertinent: "Since the world economy is challenged," he says, "India's economy also faces challenges." But if so, and every economy is weak, or "challenged", then would not the sum effect be a wash? Yet the rupee keeps sliding.
To try to boost the currency, the Indian government announced a series of measures last week to increase demand for its currency and to tamper the call for foreign exchange. This includes liberalising rules for non-resident Indians' deposits, reducing gold imports, lowering spending on foreign oil and allocating tax-free bonds for sovereign wealth funds, as well as cutting the amount that local companies can invest overseas without seeking prior approval.
But many say such measures simply won't do the job. They are, according to Gaurav Kashyap, Alpari ME's head of futures, mere "Band-Aid" solutions. "They are not enough to change what is a deeply entrenched bearish sentiment for the currency." Indeed, much of currency values is predicated on sentiment. And the judgement of the market is that India is not reforming its economic and monetary policy enough to tip opinion in its currency's favour.
To be sure, this is no easy thing to do. For one thing, slowing economic growth amid inflationary pressure makes monetary policy difficult to negotiate. And vested political and business interests impede foreign investment and the associated cash inflow that would brace the rupee.
There are difficult decisions that need to be taken, involving full-on reform and liberalisation of the economy. But without this, the threat is of a painful decline in the worth of not just the rupee, but also of the value of the Indian economy.
