It’s not just India. The Rupiah has fallen to 11,000 to a dollar, the lowest level since 2009. This part is scary:
The nation’s trade shortfall was $2.3 billion in July, compared with the $393 million median estimate in a Bloomberg survey of economists. The current-account deficit will be about 4 percent of gross domestic product or more this quarter, from 4.4 percent in the previous period, Bank of America Merrill Lynch economist Hak Bin Chua wrote in a note yesterday. This is higher than the government’s target of 3 percent this quarter.
Know why it’s scary? India’s current account deficit is 4.8% of GDP if they get their act together, and probably 5.5% of GDP if not.
What India should do is a rupee swap deal with Indonesia. In 2012-13 we imported $14.9bn worth items from Indonesia, and exported $5.3bn to it. We could do the lower – i.e. a rupee-dollar swap of $5 billion, so that Indonesia can keep rupees to pay for the rupee part of their trade, while retaining the option to convert those to dollars. (Conversion can be set at rates when individual swaps are entered into)
This is just one example. There are a number of others. If we did this with about $50 bn we could continue to import everything but the threat on the rupee will reduce (since people aren’t selling the rupee to buy dollars).