The Rupee Swoons as India Struggles

If a currency is a barometer of an economy’s health, then the Indian economy has fallen very ill. Back in April the rupee was trading at a relatively strong 44 to the dollar. India was coming off a year of solid growth, the monsoons had been good, and the stock market was holding up. Today things look far worse: The rupee has weakened 16 percent against the greenback since August. Analysts are predicting gross domestic product will grow less than 7 percent next year. And foreign investors have fled the Bombay Stock Exchange, helping drive it down 18 percent so far in 2011. If the rupee stays this weak, the cost of importing oil will jump, damping growth further.

What’s wrong? One problem is the nation’s long, unsuccessful fight against inflation. Thirteen times over the past two years, Duvvuri Subbarao, the governor of the Reserve Bank of India, has raised interest rates, adding 375 basis points to borrowing costs. Yet in October, India’s benchmark inflation rate was 9.73 percent year over year.