In a country expected to grow 6.9% in 2012, its hard to imagine that this enviable level of expansion in the teeth of a global crisis will be accompanied with a precipitous fall in the exchange rate. But thats precisely whats happening in India and fiscal and monetary policymakers are in crisis-fighting mood, a volte-face from the post-Lehman euphoria when the countrys leaders touted the economys relative resilience. The rupee has suffered extreme losses against the dollar and has depreciated 14% against it since early March. The deteriorating global economic outlook driven by fears over Greece's possible exit from the eurozone and weakness in some of its economic fundamentals principally its current-account gap, high energy-importing needs and fiscal outturn have turned investors off the economy, and the currency could continue to plummet unless action is taken by the Reserve Bank of India (RBI). And fast ratings agency Standard & Poors downgraded Indias sovereign outlook to negative in April. As is the case in most other economies, when the economy slows the trade deficit gets better, says Bhanu Baweja, global head of emerging markets fixed income and FX at UBS. But in India, this has not been the case because oil and gold imports will remain relatively the same. The most recent sell-off of the rupee between August and November last year spurred the government into action at the end of 2011, but options this time around are more limited. The government can open up the bond market further, force exporters to repatriate money back into the domestic market at a much faster pace, increase the tax on gold imports or even ban certain imports all together. However, some of these measures are extreme. Tax on gold imports increased in March and another hike could spell political suicide for the beleaguered Congress-led coalition, while measures such as the outright ban of certain imports would be seen as draconian. Recent RBI measures to contain the sell-off have been much less effective than those they introduced in the fourth quarter of last year, says Rahul Bajoria, regional economist for Asia at Barclays in Singapore. The government and central banks policy options to support the INR are limited and any FX intervention by the Reserve Bank will only provide limited support to the rupee. The Central Bank does have one viable option, explains Bajoria, which is similar to a measure that was introduced nearly 15 years ago. The RBI could opt to issue USD-denominated bonds through public sector banks for non-resident Indian investors. And if the issues are well designed and planned out, the scheme could trigger $12-15 billion of inflows in a relatively short amount of time, says Bajoria. Wrong medicine But rising indebtedness is the wrong medicine, say analysts. Any intervention by the RBI and the government will not address underlying fiscal issues in India, says Baweja. For the last five years or so, the government has postponed any meaningful fiscal consolidation and development. Instead, government officials have crossed their fingers and hoped for the best. The most recent bout of rupee weakness is down to an all-too familiar gripe: the current-account deficit has swollen this year to 4.3% of GDP compared with 3% in the last fiscal year. And even though there has been a net inflow of $8.5 billion year-to-date, the RBI has lost just about $3 billion in reserves unadjusted for currency-valuation effects year-to-date. Still, to some extent, Bajoria at Barclays believes that recent focus on India and the rupee has been blown out of proportion. The dollar is strengthening against a lot of emerging market currencies, not just the rupee, says Bajoria. Currencies in Brazil, Poland and Mexico have all weakened compared to the dollar these high-beta currencies are all in the same boat. In other words, international investors still regard India despite its economic outperformance as a high-beta play and the rupee will continue to fall prey to the binary risk on/risk off mentality in global markets. Investors will not commit to Indian equities and bonds, until there is greater clarity on two main issues: the make-up of a new Greek government and its willingness to stay within the eurozone, and on how the eurozone, the US and China policymakers will react to slowing growth, concludes Bajoria.