That makes the travails of the rupee all the more mysterious. Merchandise trade accounts for almost two-thirds of the balance on current account, although the proportion is falling as service exports rise. Hence if the trade balance is improving, a deterioration in the current account can only be explained by a worsening invisible balance. And its worsening is quite implausible in view of the booming software exports.

Thus there is every likelihood that the current account is improving; in which case the travails of the rupee could come from the capital account. It is known that portfolio investment has been flowing out. But the outflows have been exceeded by the fall in reserves. Direct investments are usually well covered by the press, and if there were sizeable movements, they would have been revealed in the pink pages.

This leaves two major possibilities. One is that the government is making huge imports which it does not allow to be shown in the trade figures - in other words, imports of military equipment. The portents were all too clear in the last budget; this government laid out vast sums for defence contracts. Presumably the weapons have started flowing in and the foreign exchange flowing out. The weakness of the rupee does not reflect the weakness of the economy; rather, it reflects the might of our army - some time in the future, at any rate.

The other possibility is that the foreign exchange market has become so narrow that small changes in the volume have big effects on the exchange rate. Recall the RBI governor's fear of speculative waves leading to a meltdown of the currency. The east-Asia meltdown, which occurred soon after he took over, seared itself in his memory; to exorcise the ghost, he has whittled down access to the foreign exchange market. Today, only those with genuine trade or capital transactions can enter the market; all speculators have been thrown out of the door.

Though the governor refuses to admit the thought, even virtuous exporters and needy importers can speculate in their ``real'' transactions - and will if they see a profit in it. And because so few enter the market every day, they can easily move the price. Reserving the exchange market for the virtuous is a game the governor cannot win.

This Business Standard editorial has been slightly edited for space.