Rupee's Travails : Blame It on Greece

There is a tendency in official circles to link the rupee’s current problems to the crisis in Greece and the eurozone. India will no doubt feel a contagion effect but the deeper problem is that the economy and the rupee are beginning to pay the price for the excessive dependence on capital infl ows, especially from foreign institutional investors and external commercial borrowings. It will not do to blame the Greek crisis for the rupee’s problems.

When the rupee hit Rs 55 to a US dollar last month (since then it has touched even bigger lows) and there was bloodbath on the bourses, Union Finance Minister Pranab Mukherjee stood in the Rajya Sabha like the proverbial boy on the burning deck and assured the House that they were not caused “by any intrinsic weakness of the Indian economy but due to global risk aversion following the heightened uncertainty in the Eurozone stemming from the fresh crisis in Greece”.

He went on to enlighten the House how an election in Greece defeated a party in power and created uncertainty about a package of austerity measures it was committed to put through. He went on to elaborate how uncertainty in Greece reverberated across the globe and hit Indian shores. He made the statement with an air of assurance and asserted that once the eurozone crisis blew over, the Indian rupee would find its own level of stability. Indeed, it is the most simplistic and optimistic of explanations ever given about the gravest crisis threatening the economy. Or, to put it differently, it is the first time ever that the minister conceded that the Indian economy was being affected by the crisis in the eurozone. In the past, he lived in denial.