A Look At Indias Depreciating Rupee and Widening CAD In 1991, India had reserves to cover only three weeks

of import, which then forced the government to pledge its gold in order to pay its bills, and had to push through reforms to start opening up the economy. Today, with only enough cash (worth $279 billion) in the Reserve Bank of India (RBI) to pay for seven months of imports, $172 billion of debt falling due in the next eight months and weak fund inflows, the question on everybodys mind is, is India looking at the repeat of its 1991 crisis? Many economists believe that we are not close to a crisis similar to 1991, but it cannot be ruled out of realm of possibility. RBI is said to consider three months of import cover as a minimum acceptable situation; however, many economists are vexatious about the fact that the reserves have run down lowest in terms of import cover since 1996. The current account is in persistent deficit, a record 4.8% of GDP in 2012/2013. Previously, current account deficit wasnt of much concern since the capital account would balance the deficit. However, within the last 3 months, FIIs have sold $11.3 billion worth of bonds and equities since May 22, the day the US Fed first hinted at scaling back the stimulus, which has further put a strain on the capital account. Of late, the RBI and Government has been taking various measures to control the widening Current Account Deficit (CAD) and depreciating Rupee, which has fallen by 12.2% in 2013 and fared worst among the Asian currencies. Government increased the import duties on non-essential goods namely gold, silver and platinum to 10% which would curb the gold imports; the compression would pare the import bill by $7 billion this year; arrest the falling value of rupee and contain the fiscal deficit at 3.7% of GDP. To stern the volatility in the exchange rate of rupee, the rate of interest subvention were increased from 2% to 3% and further, norms for overseas fund raising by corporates were relaxed so as to finance the expanding CAD. In addition to the slew of initiatives recently undertaken by the Government, it should keep volatility under check through curbs on speculation and intervention and remove roadblocks to foreign direct investment proposals. The exigent issue for the government now is to ensure that India does not undergo a reiteration of 1991 crisis!