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The currency crisis has given rise to speculation on what outgoing Reserve Bank of India governor D Subbarao was repeatedly hinting, well before the free fall of the currency.
In the past couple of months, the central bank had talked about a possible reversal of the interest rate regime if the rupee continued to slide. RBI had reduced the repo rate (at which it lends to banks) thrice this year before holding on to it at the next three review meetings.
The hawkish tone of Subbarao was not reflected in his action and he also said communication was a part of policy instruments. The markets discounted the communication theory and only took note of the action, as was evident in the journey of government bond yields, which continue to head south.
Since the annual policy review in May, Subbarao's team met twice to review the stance. Status quo was maintained on the ground that growth was weak.
Subbarao, who found himself alienated from what the finance ministry thinks during the later part of his tenure, could not walk the talk.
Now that a fullblown currency crisis has engulfed the markets, there is a change of guard in the institution whose primary responsibility is to have price and exchange rate stability. The priority in the market is to get back stability. Among the questions is whether Raghuram Rajan, the governor-in-waiting, would opt to raise policy rates, to show he means business.
He faces a tough task. Within a fortnight of taking charge, he will have to announce the mid-quarter review of monetary policy, scheduled on September 18. It is to be seen if he can change the fortune of the rupee.
