Editor's Note

Inside job, Indian style

Abysmal policy inaction by UPA-IIhas pushed the Reserve Bank, not to mention the country, into a very precarious position

The precipitous fall in the rupee in recent months has shocked most people. Not us. You may recall reading the following on this very page — in our issue dated June 26, 2010 — when we presented a cover story on how to cope with a volatile rupee. “Seeing the yo-yoing in the past two years, it is amply clear that the rupee is far from charting it own destiny. It is still driven by the dollar (and the dollar is now being driven by the euro). ...As things stand now, sustained low interest rates in the US — and now the Eurozone, too — makes a strong case for money flowing into emerging markets like India. This should ideally keep the local currency buoyant. But there is a caveat here: the world’s fixation with the dollar. So if there is trouble brewing anywhere in the world, capital flees to the US. The fact is, the world still does not see the dollar as a competing asset class to other currencies but as an alternative to cash. Especially so, when the world is fearful.”

Yet, to say that the economic turmoil in the Eurozone has caused a spike in the dollar and weakened the rupee is only one side of the coin. Of course, since a large part of foreign inflows come through portfolio investments, the rupee is extremely vulnerable to how global investors behave. But considering that foreign portfolio flows have been positive year-till-date, there is little reason for the rupee to have fallen but for domestic issues. Growth is creaking to a halt and that too at a time when government finances are in a dilapidated state. Ironically, the central bank is now being blamed for a mess that is not of its own making. In The Perfect Storm, deputy editor Rajesh Padmashali articulates on how the Reserve Bank of India has been driven into a corner, leaving it to figure out how to deal with a multitude of conflicting objectives. 

In other stories, we take a look at how new private banks are aggressively raising savings rates in a bid to mop up low-cost deposits. Is this really a good strategy? Then, The Other Shoe Drops is an interesting story on Reebok India, which has been hit by fraud.