Abheek Barua The author explains how the government could make a real difference in the financial markets.
Let me cut to the chase. What are the options left for the government to bring some stability back to the rupee?
What are the short-term fixes, and the somewhat longer-term policies, that could help achieve this?
Two things need to be emphasised at the very beginning. First, the shortage of capital flows into emerging markets is unlikely to go away in a hurry.
The United States Federal Reserve might or might not taper in September and an initial taper could indeed be baked into the emerging market currency exchange rates vis-à-vis the dollar.
However, it seems certain that the Fed will start winding quantitative easing down by the end of the year - and whatever the pace of the taper, the infusion of dollar liquidity will keep reducing over 2014. Thus, India and other emerging markets have to be ready for a long dry season ahead.
Second, the option of simply "growing" ourselves out of this problem is limited. Better execution of projects and a more conducive investment environment (difficult to achieve when elections lie ahead) might improve sentiment towards India and invite capital flows, but there is a risk of growth stretching the current account deficit wider.