A Sisyphean Task

At the time of writing this post the Indian rupee has lost 17% of its value against the US dollar since early May, while the Nifty has dropped by around 14%. The RBI and the government have undertaken a series of mostly short-term measures to curb the rupee’s fall, from tightening liquidity, curbing imports, encouraging capital inflows and restricting capital outflows by residents and domestic firms.

As I’ve written elsewhere, it isn’t quite 1991. India has around US$260bn worth of reserves, which are sufficient to cover six months’ worth of imports. However, around US$170bn worth of debt needs to be refinanced by March 2014 (both short-term debt and long-term debt maturing in the next year).

The RBI is now attempting to maintain an inverted yield curve, pumping liquidity into the long-term end of the bond market in a bid to lower bond-yields. Without structural reforms to address the fiscal deficit, bring down inflation, and thereby boost growth prospects, I’m not convinced that these measures will provide anything other than short-term relief.

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