What type of crisis for India?

Orderly rupee depreciation, a lower fiscal deficit and credible stress tests for banks are essential to stave off crisis

Ashoka Mody & Michael Walton

In mid-1994, Rudiger Dornbusch and Alejandro Werner warned that Mexico was heading into a crisis. Few academic papers have been so prescient. Not only was there a crisis later that year, but it followed the playbook that the paper outlined. The late Professor Dornbusch and Mr Werner (now a senior official at the International Monetary Fund, or IMF) were worried on three counts. The exchange rate was substantially overvalued, economic growth had stalled, and the financial system was under stress. A loss of confidence, they warned, would lead to a sharp depreciation of the exchange rate, a ...