If one thing is clear from India's impulsive strategies this month to defend a plunging currency, it is that the central bank's policy bias towards supporting growth is innate, even in a crisis.
When the rupee hit a record low on July 8, the Reserve Bank of India (RBI) withdrew cash from money markets, making bets against the currency significantly more expensive. It intervened to stop the currency from dropping beyond 60 per dollar and at the same time tried to assure investors the shock measures were temporary.
To most RBI watchers, this amounted to a menu of stop-gap measures that failed to account for lasting pressure on the currency. To the central bank, it was doing enough to support the rupee without tightening cash conditions so much that it threatened the longer-term growth of an already weak economy.
The eye on growth means it has avoided following its emerging market peers Indonesia, Turkey and Brazil, who all raised their policy rates in anticipation of a long spell of capital outflows as the United States prepares to tighten policy.
It is unlikely to raise rates either on Tuesday, when it reviews policy, even though analysts argue it should do so if it wants to signal its determination to attract foreign funds and defend the currency. History suggests these decisions are deliberate and ultimately growth is the overriding factor.
The rupee has fallen 33 percent against the dollar since 2007. As recently as 2010, the RBI's reluctance to raise interest rates for fear of affecting growth allowed inflation to remain at near double-digit levels for two years.
"The right approach would have been to move the official policy levers," said Rajeev Malik, senior economist at CLSA in Singapore. Malik feels the central bank might be hoping a temporary tightening of money markets will stabilise the rupee. And that the RBI is either too optimistic or it is wary of announcing a turn in monetary policy.
"Ultimately, at least how I see global liquidity developing, it will be a lose-lose proposition," he said. "India will suffer a GDP downgrade and the rupee will also break 60 in a sustained manner. They have boxed themselves into a corner." To be fair to the central bank, the country's balance of payments problems are beyond its control.
India has historically been a capital-starved economy, with imports and foreign debt servicing bills that far exceed revenues. Capricious governments have done little to ensure a