India’s government is assembling a sweeping policy package designed to stave off a full-blown currency crisis, as the rupee slides toward levels that would have been unthinkable just a year ago. The currency is now trading near 95-96 per US dollar, making it Asia’s worst-performing currency this fiscal year with double-digit depreciation.
The Reserve Bank of India has already thrown over $100 billion at the problem through interventions in spot and forward markets.
What’s driving the crisis
The ongoing conflict in Iran has sent oil prices sharply higher, and India, one of the world’s largest crude importers, is feeling every dollar of that increase. The result is a dramatically wider trade deficit. Foreign investors have been pulling money out of India at a pace that has alarmed policymakers, selling rupees and buying dollars on the way out, which compounds the pressure from the trade deficit.
While India’s reserves remain substantial at approximately $700 billion, the pace of depletion has clearly rattled the Modi government and the RBI under Governor Malhotra.
