‘Temporary’ steps to control volatility of the Indian Rupee.
By R. Chandrasekaran
CHENNAI: The Reserve Bank of India has announced another set of measures aimed at defending the Indian currency. This comes on the heels of inflation data accelerating in July as a fall out of a sharp drop in the Indian rupee, which closed in the red on Wednesday.
The latest measure restricts overseas direct investments, slashed the limits on remittances, besides banning property purchases overseas. The annual cap on remittances has been cut down from $200,000 to $75,000. Also, there is now a ban on overseas real estate purchases.
The finance minister P. Chidambaram said that these were temporary measures to stabilize the rupee.
“I want to make it clear that these are not capital controls. There is no intention to go back to capital controls,” Chidambaram told in interviews to television channels.
A little over a week back on August 6, the Indian currency dropped to a life time low of 61.81 beating the previous low of 61.21 recorded on July 8. The Indian rupee has dropped significantly since foreign investors have pulled out approximately $11.6 billion from the debt and equities market after the U.S. Federal Reserve indicated tapering of monthly bond buying program towards the end of May.
The government and the central bank have been taking various measures to defend the sliding rupee. Only on Monday, Chidambaram had indicated proposed steps to protect the rupee following the previous Thursday’s announcement from the RBI to sell Rs.220 billion worth of cash management bills every Monday without specifying the time frame.
The government has increased the import duty on gold and silver on Tuesday with similar steps on the cards for luxury items such as electronic items. However, the efforts proved to have any significant impact on the volatility of the Indian rupee as the currency continue to remain weak. However, analysts and experts strongly believe that but for the RBI and government measures, rupee would have fallen further.
The finance minister seems to be firm in defending the Indian currency when he said, “We cannot allow the rupee to go into a free fall.”
While replying to a debate on inflation in the Rajya Sabha on Wednesday, Chidambaram said, “We must have a monetary policy that’s prime objective is price stability, but must be seen part of a larger mandate of growth and employment.”
Similarly, while replying on the economy in the Upper House of the Parliament, he said he is expecting strong foreign investment to bridge the current account deficit (CAD), which reached 4.8 percent of the GDP in the fiscal year ended March 2013. He has also expressed the confidence that the Indian currency will find its right level after the relevant parameters are looked into.
The finance minister reiterated once again that the government will not leave any stone unturned to contain the CAD at about $70 billion and that the deficit would be controlled to 3.8 percent of the GDP in the current fiscal year.
To contact the author, email to rchandrasekaran@americanbazaaronline.com