So, the Reserve Bank of India came to a gunfight carrying a knife. The effect of the RBI's efforts late Thursday to support the rupee lasted less than 24 hours.
The beleaguered currency, which recently has been trading near a record low against the U.S. dollar, appreciated slightly after the RBI's technical moves aimed at reducing speculation. But by Friday afternoon, the rupee--which has fallen more than 18% against the dollar since April--was sliding back down.
That's hardly surprising. While the RBI's measures will curb hoarding of dollars, the fundamental vulnerability that plagues the Indian currency remains. The rupee's rapid decline stems from a combination of high inflation--at 9.1% in November--slowing economic growth and a sizable current-account deficit, expected to reach 3% to 3.5% of gross domestic product this year, up from 2.5% last year.
New Delhi's flat-footedness on critical economic reforms and heavy spending on populist schemes don't instill confidence either.
That gloomy picture has seen outflows from foreign institutional investors amount to a net $173 million, compared with last year's inward surge of nearly $29 billion. This is critical to India, which is a net importer and relies heavily on foreign capital inflows to finance its balance of payments.
The RBI signalled Friday it is focused on growth. At its mid-quarter policy review, the central bank left its key interest rate changed, after 13 increases in the past 24 months.
The central bank also offered a limited statement on the rupee, saying it will respond as appropriate. In fact, it has few tools that are likely to be effective.
Meanwhile, India's weak fundamentals are unlikely to change soon. Until they do, a rebound in the rupee is implausible.
