INDIA slapped new controls on Wednesday (August 14) on foreign exchange outflows as it struggled to narrow a record current account deficit and arrest the fall of the rupee.
The central bank announced that Indian firms can only invest 100 per cent of their net worth abroad, down from an earlier 400 per cent.
Resident Indians now can only send out of the country $75,000 (£) each year – down from $200,000 (£) annually, the bank said on its website, and the money cannot be used to buy property.
“The present set of measures is aimed at moderating outflows,” said the Reserve Bank of India.
But it said it would consider allowing bigger outflows for “any genuine requirement” and added the restrictions would not apply to overseas investments by state-run energy firms to feed India’s fuel-hungry economy.
The steps followed plans announced by the government earlier in the week to curb imports of oil, gold and some non-essential goods and allow state-run firms to issue quasi-sovereign bonds abroad to help plug the deficit.
India last year recorded its biggest-ever current account deficit – the broadest measure of trade and capital flows.
The deficit and India’s stuttering economic growth have put heavy pressure on the rupee, which has been hitting a string of lifetime lows against the dollar.
“We will leave no stone unturned” to control the current account deficit and stabilise the rupee, Finance Minister P Chidambaram told parliament.
But financial markets have been unimpressed so far by the measures announced.
The currency slid by more than a third of a rupee on Wednesday to a new closing low of 61.43 rupees to the dollar, just shy of its lifetime trough of 61.80 it hit last week.
Economists dismiss India’s moves as “plumbing measures” and say to ensure investor confidence and a long term revival of the rupee far-reaching reforms are needed to open up the still heavily state-controlled economy.
The capital controls were announced as India’s woes were underscored by data showing inflation spurted to a five-month high in July as the weak rupee drove up import costs.
The Wholesale Price Index, India’s main cost-of-living benchmark, accelerated to 5.79 per cent from a year earlier, far outstripping market forecasts of a five per cent jump.
The inflation resurgence will delay even further interest rate cuts needed to boost the economy, which has been growing at five per cent – its lowest pace in a decade – economists said.
The central bank “has to cater to both currency and inflation risks”, which means monetary easing to kickstart growth “is off the table for now”, said HSBC economist Leif Eskesen.
Politically sensitive food prices climbed in July by 9.74 per cent while the cost of onions – a staple in every Indian diet – soared by 145 per cent on an annual basis.
The Congress-led government has been desperate to tame inflation, especially of food, and revive the economy, fearing a voter backlash in elections due by May 2014.
India’s troubles have been exacerbated by signals the US could soon slow its stimulus drive that prompted big investment flows to emerging markets, and homegrown graft scandals that have alarmed foreign investors.
