ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

Macroeconomic Vulnerability and the Rupee's Decline

Underlying the recent dramatic depreciation of the rupee is a set of structural weaknesses that not only renders the high growth of the first decade of the 2000s brief and ephemeral, but also results in persisting infl ation and current account deficits even when growth decelerates. This combination of outcomes then feeds a downward spiral, of which rupee depreciation aggravated by speculation is one symptom. Unwilling or unable to address these structural weaknesses, the government is seeking a solution in enhanced foreign capital inflows and is therefore desperately wooing foreign investors. While the logic and potential success of that effort is uncertain, its cost is likely to be a turn to austerity that can convert a difficult macroeconomic situation into one of crisis.

The sharp depreciation of the rupee is only the latest symptom of the macroeconomic imbalance afflicting the Indian economy. There have been a host of other indications of the basic malady. The fact that the country is off its briefly experienced “high growth trajectory” is the least of its problems. More troubling for the government is that symptoms of “overheating” such as a large current account deficit (CAD) and high inflation paradoxically accompany the downturn or slowdown in growth. This stagflationary environment encourages, in turn, foreign investors and lenders to hold back or withdraw from the Indian market. It is because of this combination of circumstances that the rupee weakens and becomes prone to speculative attack. In the event, slow growth, high consumer price inflation, a wide CAD, and a weakening rupee combine to make the country one of the poorest macroeconomic performers among its peers, aggravating the flight of capital out of India. This self-propelling downward spiral is taking the economy to the verge of a crisis, even while the government is in a state of denial.

Underlying the CAD

Dear Reader,

To continue reading, become a subscriber.

Explore our attractive subscription offers.

Click here


To gain instant access to this article (download).

Pay INR 50.00

(Readers in India)

Pay $ 6.00

(Readers outside India)

Back to Top