India fighting worst crisis since ’91 limits capital flows

Rupee Falls

In the spot market, the rupee fell 0.4% to 61.4437 per dollar before the announcement. It has lost 11% this year, the second most among 12 Asian currencies. The rupee touched an all-time low of 61.8050 on Aug. 6.

The Bank of New York Mellon India ADR Index for Indian stocks traded overseas rose 0.2% yesterday to 1011.77, paring its decline this year to 3.3%. India’s benchmark Sensex index is down 0.3% this year. Financial markets in India are closed today for the Independence Day holiday.

The rupee’s plunge accelerated since May as foreign investors pulled money from Indian bonds and stocks on concern the U.S. will pare stimulus. International investors cut their holdings of Indian bonds by $10 billion since a peak in May to $28 billion, the lowest since January 2012, according to central bank data.

Steadying the rupee is the top priority for policy, the monetary authority said on July 29.

Capital Controls

The imposition of capital controls is one facet of the “impossible trinity trilemma” that Subbarao says the central bank is facing. The economic theory argues that it isn’t possible to have free movement of capital, a fixed exchange rate and an independent monetary policy simultaneously.

To contain the currency decline, the RBI raised two interest rates July 15 and restricted bank’s access to cash through its daily repurchase auctions.

India also boosted import duties on gold and silver on Aug. 13 and banned the import of gold in the form of coins and medallions to reduce the trade deficit. In a briefing in New Delhi yesterday, Economic Affairs Secretary Arvind Mayaram said imported gold must be stored in government-mandated warehouses.

So far, the efforts have fallen short as capital outflows make it more difficult for India to bridge the gap in the current account, the broadest measure of trade.

The deficit widened to an unprecedented 4.8% of gross domestic product in the year ended March 31. The government aims to narrow the gap to 3.7% of GDP, or $70 billion, this year, Indian Finance Minister Palaniappan Chidambaram told parliament in New Delhi yesterday.

New Banker

Raghuram Rajan, the University of Chicago economist credited with predicting the 2008 financial crisis, will take charge of the Reserve Bank next month after Subbarao’s term ends Sept. 4. There’s no “magic wand” to fix India’s problems, he said on the day of his appointment Aug. 6., while adding the RBI and the government will deal with the challenges.

The measures “are unlikely to have a meaningful impact on the currency,” Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance, said in a phone interview. “For a long-term impact we need to increase the attractiveness of India as an investment destination.”

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