INDIA’S PARADOX: RISING GROWTH AND FALLING RUPEE

LAST week, India and Indians got a happy surprise.

- SHANKKAR AIYAR

India’s GDP grew by 8.2 percent in the second quarter—way higher than all estimates. This week, Indians bore the brunt of a nasty surprise. The rupee hit 90.28 per dollar, crossing a milestone and into a psychological zone. The strange cohabitation of rising growth and falling currency highlights the faultlines and one of many paradoxes flickering in the political economy.Consider the journey of the rupee. It began the year at 85.80, and by December, it had depreciated by around 5 percent. Imagine estimating the fall and cost of hedging against it. What is noteworthy is that in these 12 months the dollar index DXY yo-yoed up and down, from 109 to 96 and 99. The rupee went down with the dollar and continued sliding even when the dollar recovered. Unsurprisingly, the rupee has got tagged as the worst-performing currency in Asia.

One would think that the rupee’s depreciation would merit attention, but it didn’t find mention in Friday’s monetary policy statement. It would seem it was par for the course. Governor Sanjay Malhotra said the RBI will intervene to curb volatility and doesn’t have a target level for the rupee. Arguably, there is not much the RBI on its own can do—it has intervened in recent weeks, but clearly there are limitations to using the $686-billion war chest.