India faces growth dilemma as rupee falls to a record low
The rupee's weakness is a reminder of India's urgent need for economic reform.
"The Indian economy is currently stuck in an unenviable cycle," says Deepak Lalwani of consultancy Lalcap. GDP growth in the year to March was just 5%, the lowest rate in a decade. Under normal circumstances, this would spur the Reserve Bank of India (RBI) to ease monetary policy and stimulate growth but at present, policymakers don't have that option.
A yawning current-account deficit 4.8% of GDP last year and fickle capital inflows from foreign investors have sent the currency tumbling to a record low below 61 rupees per dollar, with no sign yet that the bottom has been reached. Under these circumstances, restoring macroeconomic stability has become the "primary concern", say analysts at Standard Chartered. The RBI is likely to maintain a relatively tight monetary policy in an attempt to stop the rupee's slide.
Will higher interest rates be enough to put a floor under the currency? Probably not the central bank itself acknowledges that its policies "will, at best, provide breathing space" for the government to act more decisively, says Standard Chartered. To this end a range of other measures are being considered, notes James Crabtree in the FT, including "attracting foreign inflows through instruments targeted at non-resident' Indians living abroad, or dollardebt issues from state-backed firms".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Meanwhile, finance minister P Chidambaram has also appealed to Indian consumers to contain their "passion for gold", arguing that excessive gold imports are a significant factor in the ballooning current-account deficit.
However, these steps probably do not go far enough. After all, the rupee's weakness is a symptom of the structural problems that face the economy, say analysts at DBS; such problems "require the reform process to be cranked up yet again" to attract increased long-term foreign investment, rather than short-term inflows.
Such reforms have regularly been delayed, but "India acts best in a crisis", says Lalwani, so the rupee's current woes may well be what's needed to push the country forward. Nonetheless, policymakers including former IMF chief economist Raghuram Rajan, who will take over as RBI governor next month have a good deal of work to do.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Number of million-pound homes for sale doubles since 2019 – which UK areas have seen biggest increase?
Just over 5% of homes for sale across Britain are now priced at more than £1 million, versus just under 3% in 2019. Which areas of the country boast the most million-pound properties?
-
Why getting sick will cost you £500 a month in pension savings
More people could face a state pension shortfall as the healthy life expectancy age declines. Do you have £500 extra a month to cover your sick years?