New Delhi, May 29 -- India is trying to defend both the rupee and the stock market simultaneously. That is an expensive macroeconomic ambition for a country running persistent current account and lately, balance-of-payments deficits. Especially when a large part of its forex reserves are not earned surpluses, but rented capital.

Suppose you take a Rs.10 lakh loan from your neighbourhood bank. The cash sitting in your account may look like an asset. But economically, it is still a liability.

That, in pure accounting terms, is the best way to understand a large part of India's forex reserves. Instead of "earned" savings, unlike China's, India's forex reserves are largely borrowed liquidity and counter-intervention cushions.

The distincti...