The economy has become a gamble.

After falling 650 points when the US and Israel test fired 2 missiles in the western Mediterranean the Sensex jumped 333 points yesterday, it is up 405 points today. The rupee fell to 68.62 to the dollar, not far from its lowest level of 68.86, but finished the day at 67.69 after the RBI intervened in the market. Today it has strengthened to 66.2 to the dollar. The gains are being attributed to the the speech by Raghuram Rajan who took over as the Governor of the RBI yesterday. As usual he talked about the strong " fundamentals " and outlined a few steps he would take to improve the economy but nothing else has changed. The economy grew 4.4% in the first quarter and growth will be even weaker in the rest of the year. Some economists are predicting growth as low as 2% next year. Both S&P and Moody's have threatened a rating downgrade to junk status if there is no improvement. The HSBC Purchasing Managers' Index for manufacturing for the month of August fell to 48.5 from 50.1 in July. Any reading below 50 indicates contraction while greater than 50 indicates growth. This is the lowest in 4 years and the first below 50 since March 2009. The HSBC PMI for services has dropped to 47.6 in August from 47.9 in July, the weakest since April 2009. Livemint, 4 September. Retail inflation continues to be above 9% and the Wholesale Price Index will also rise because of the falling rupee. Most alarming for India, the US Senate has voted for a limited strike on Syria with " no boots on the ground ". Obama does not want to be remembered as a gasbag and is desperately looking for a " legacy ". And what better way to prove your mojo than to bomb another country in Asia to get rid of an evil dictator by killing hundreds of women and children and then dismissing them as collateral damage. It is not just the bombing that is frightening but what the reaction to it will be. The Hezbollah will see it as an existential threat as its arms supply will be cut off, Iran will see it as a dress rehearsal for bombing its nuclear facilities and the Muslim Brotherhood wants revenge for its losses in Egypt. Will they retaliate against Israel, Saudi Arabia or oil shipping in the Gulf we do not know. So why are the markets behaving as if they are high on ecstasy? Perhaps, like a gambler who puts his last rupee on a 100:1 outsider in the hope of recovering his losses, these punters are praying for anything to celebrate.