The rupee hangs by a thread. How strong is it?

The Consumer Price Inflation fell to 4.38% in November compared to 5.52% in October, while the Wholesale Price Index fell to 0% because of the fall in the price of petroleum products, following a 45% fall in the price of crude, and 6.97% fall in prices of vegetables because of a high base effect and seasonal supplies. While that is good the bad news was that the Index of Industrial Production fell by 4.2% in October compared to the previous month. Consumer goods fell by 19% and consumer durables by 35%, dragging manufacturing down by 17.6% and capital goods by 2.3%. So is inflation finally beaten and should the Reserve Bank, given these figures, cut interest rates to make it cheaper to borrow money so that people can spend more, thus stimulating demand? Not so easy for the RBI because the rupee dropped to 62.95 to the dollar, which increases costs of imports. The rupee has not dropped as much as other emerging market currencies, such as the Brazilian real and the Indonesian rupiah, the Russian ruble having collapsed by around 45%. Although governments have built up dollar reserves of $9 trillion companies in emerging markets have borrowed $5.7 trillion. If Russia and/or Venezuela default on their debts all currencies could collapse, including our rupee. Indian companies have borrowed abroad at around 1% to invest in India, in what is know as ' carry trade ', and many companies have not hedged their loans, to reduce costs. The external debt to GDP ratio has increased from 18% in 2010-11 to 23% in 2013-14. If the Federal Reserve in the US starts raising interest rates and the ECB resorts to quantitative easing, which is looking almost certain, the dollar is certain to get stronger. Foreign investors have bought $25 billion worth of government bonds and $9 billion worth of corporate bonds in this financial year as well as $17 billion worth of equities. Lowering interest rates by 25 basis points is of no use but if the RBI lowers interest rates by, say, 100 basis points the arbitrage opportunities become less and foreigners could stop investing in India. That would take away a major support for the rupee. Many experts say that foreign funds cannot sell out Indian stocks and bonds because prices would plummet and as they try to repatriate this money from India the rupee will drop, so they will lose heavily. Will they? They can hedge on the futures market before they sell out, knowing that the market will drop and they will not lose. Add to that the fact that the government has already used up 90% of the deficit of the budget for the full fiscal and the outlook becomes much more complicated. That is why people buy gold. Not stupid are they?