India’s currency and equity markets dropped sharply on Friday following new government restrictions that some say risk sending a panic signal rather than providing a long-term solution.
The rupee hit a new intraday record low, briefly surpassing 62 to the US dollar. The benchmark Sensex was down 4.1 per cent in afternoon trading in Mumbai at 18,572, its worst session since September 2011. The index tracked regional counterparts lower after data overnight showing weekly US jobless figures at their lowest since late 2007 fuelled talk the Federal Reserve could soon start tapering off its quantitative easing programme.
With markets closed on Thursday for the independence day holiday, Friday was the first chance for investors to react to the Reserve Bank of India’s move late on Wednesday to reduce the maximum amount of outward direct investment permitted by companies and individuals to a quarter of its previous level, capping it at 100 per cent of the Indian investor’s net worth.
The RBI’s move is the latest in a series of measures as India’s policy makers struggle to stem currency outflows and support the sliding currency. Steps so far have included hikes in the customs duty on gold and increases in the cost of short-term borrowing aimed at raising the cost of currency speculation.
“The government steps, the way these things have been done – they haven’t sent out a consistent message,” said A Prasanna, head of research at ICICI Securities PD. “If you look at the fundamentals, the trade deficit has improved. But the problem is that sentiment is quite adverse to the rupee.”
The rupee sank as far as 62.03 against the dollar on Friday, breaching its previous low of 61.8 hit on August 6 before recovering to trade at 61.7 in the afternoon.
While the rupee’s sharp fall – more than 11 per cent during the past few months – has caused consternation in India, some analysts say it was necessary, as the real effective exchange rate had been rising given the persistently high inflation and had eroded India’s competitiveness.
“A certain degree of rupee depreciation was always on the cards,” Ranjan Dhawan, executive director of the Bank of Baroda, told Indian television on Friday. “Now that it has happened, it will make the exports of the country more competitive, and there should be some import compression also. When you combine that with the increase of various duties in some goods, it should lead to some compression of the current account deficit.”
The rupee’s decline began as part of a wider trend of emerging markets currencies falling against the US dollar the past few months, as expectations grow that the Fed will begin to wind back its stimulative asset purchases by the end of this year.
But recent actions by India’s policy makers have also hit sentiment. Analysts consider the new capital controls a salve that will not solve the country’s balance of payments problem. Economists at HSBC labelled the central bank’s latest steps “plumbing measures”, adding that structural reforms are required and noting that it may be difficult to push those through in a pre-election year.
India’s unsustainable current account deficit is a key concern for policy makers as growth in Asia’s third-largest economy slows sharply. Earlier this week Palaniappan Chidambaram, finance minister, pledged to reduce the deficit from 4.8 per cent of gross domestic product in the year that ended in March to 3.7 per cent of GDP in the current fiscal year.
Slowing economic growth and disappointing fiscal first-quarter corporate earnings are taking a toll on Indian equity markets. With the rupee at record lows Rajen Shah, chief investment officer at Mumbai-based Angel Broking, says investors now fear foreign institutional investors will start selling Indian stocks.
“That would be a panicked move,” he says, noting that foreign institutional investors who bought shares in 2010 or 2011 would face losses of up to 60 per cent if they exit now.