The Melodrama of the Rupee

In Oscar Wilde's "The Importance of Being Earnest," Miss Prism tells Cecily, "you will read your Political Economy in my absence. The chapter on the fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side."

Wilde's humorous intentions notwithstanding, the rupee is now providing the world with some melodrama. As Shubha Ganesh of The Economic Times wrote last weekend,  rupee depreciation has become a pressing concern of the government there "as a weak currency is expected to impact the domestic treasury as India meets 80 percent of its energy needs with imports."

Private companies in India, notably Reliance Communications (RCOM) a huge telecomm concern, have a lot of bonds reaching maturity in 2012, many of them foreign currency convertible. As another story this week in The Economic Times noted, "the timing could hardly look any worse."

A company that has issued, say, $1 billion in FCCBs is committed to pay the rupee equivalent of $1 billion US dollars when the bonds reach maturity. That is surely a key reason why the bondholders bought that sort of bond, why they've proven so easily marketable, after all: FCCBs let the buyers hedge themselves against any melodramatic fall of the rupee at the expense of the issuer.

If a major Indian company could find itself incapable of meeting those obligations -- well, we are all familiar with the ways of corporate metaphorical dominoes these days.

Yes, Cecily, this could get a bit too sensational.