The US dollar gained momentum and gained over its Indian counterpart and an average importer has to now pay roughly 53 rupees to procure a dollar. The surging dollar rate would be the biggest worry for the Reserve Bank of India. The signs prove disastrous for the economy when the system is struggling with high inflation and slippage in fiscal deficit. The USD advantage suggests that the fundamentals for the rupee are very weak and are sure to further dip down. The domestic cues are bearish and external sector is yet to see the worst.

Speculators are unanimous on the end of monetary tightening cycle but stand divided on shift into monetary easing cycle. The option left with the RBI is to allow the liquidity squeeze of 2.0-2.5% of Net Demand and Time Liabilities (up to Rs.1.5 Trillion) if it could help cushion rupee weakness. The situation looks complexity that surrounds the crisis. So ultimately it is better to stay neutral and is important for investors to stay square into monetary policy by unwinding long bonds and square short equities. A review to the present scenario can only be stipulated when RBI reverses into monetary policy easing stance.

Economic policy in India, especially in the last two years, has been unfocused on the real issues and instead has diverted attention to more peripheral ones. The separation of political power from the leader of the government has made things much worse.