India fighting worst crisis since ’91 limits capital flows

India increased efforts to stem the rupee’s plunge and stop capital outflows that are pushing the economy towards its biggest crisis in more than two decades.

The Reserve Bank of India, whose Governor Duvvuri Subbarao steps down next month, cut the amount local companies can invest overseas without seeking approval to 100% of their net worth, from 400%, according to a statement late yesterday. Residents can remit $75,000 a year versus the previous $200,000 limit. Rupee forwards rose for the first time in three days.

Policy makers’ moves since July to tighten cash supply, restrict currency derivatives and curb gold imports have failed to arrest the rupee’s slump to record lows as they struggle to attract capital to fund a record current account deficit. The rupee has weakened 28% in the past two years, the biggest tumble since the government pledged gold reserves in exchange for loans from the International Monetary Fund in 1991.

“I don’t think this fixes India’s problem, at best it restricts about $5 billion of flows annually, which doesn’t make a dent,” Bhanu Baweja, the global head of emerging market cross asset strategy at UBS AG, said in a phone interview from London yesterday. “The minute you restrict outflows, people will start legitimately speaking in terms of capital controls, although these are only on locals and not on foreign investors.”

Cash Reserves

Central bankers also exempted lenders from cash reserve rules for certain foreign-currency deposits yesterday. Banks accepting non-rupee deposits after Aug. 24 from Indians living abroad need no longer keep 4% in cash and invest 23% in government-approved securities, the RBI said.

Nomura Holdings Inc. estimated that private remittances and outward direct investment abroad totaled $15.9 billion in the year ended March 31, citing central bank data.

Expanding Markets

“Indian companies’ outward foreign direct investment has been growing in recent years for various reasons such as pursuing growth markets, technology, natural resources, and these could be adversely hit,” Sonal Varma, an economist at Nomura in Mumbai, wrote in a report yesterday. “While the authorities aim to reduce foreign-exchange volatility, we fear that they may end up sending a panic signal.”

One-month offshore non-deliverable rupee forwards, which investors use to hedge or speculate on the currency, rose 0.2% 61.83 per dollar yesterday. NDFs touched a record low of 62.53 on Aug. 6. The contracts, settled in dollars, are agreements to buy or sell assets at a set price and date.

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