Rupee, fuel: Questions Modi raised against last govt now haunt him too

A couple of things happened last week in India that deserve a bit of attention -- mostly because they reveal how deep the country’s structural problems go and how few good options the government has left. The first was the Reserve Bank of India’s decision to hold interest rates steady even though the rupee had hit record lows against the U.S. dollar. And the second was the federal government’s attempt to suppress rising fuel prices.

The RBI’s steadiness on rates was born of its belief that inflation was close enough to the bank’s target zone. Now, you might disagree with this belief -- as I do -- but there’s no question that the central bank’s monetary policy committee was doing its job as it saw it.

The problem lay in the reaction to the RBI’s decision. Naturally, the rupee fell even further; markets had hoped for higher interest rates that would have encouraged foreign investors not to sell their rupee-denominated assets. A chorus of voices, some within the political establishment, began to complain that the RBI was ignoring the rupee, ignoring threats to growth and so on.