India’s rupee sank to a record on concern recent steps to steady the currency will prompt foreigners to rethink investment plans amid speculation the US will pare stimulus next month. Bonds and stocks plunged.

 

The Reserve Bank of India, or RBI, on August 14 announced measures to limit foreign-currency outflows from local companies and residents, and boosted efforts to lure investment. US housing starts and consumer confidence data on Friday may stoke speculation the Federal Reserve will trim its bond purchases next month, after jobless claims in the world’s largest economy fell to a six-year low.

Economic Affairs Secretary Arvind Mayaram on Friday said there is no intent to defend the rupee at a particular level. The government doesn’t plan to curb commercial outflows or impose capital controls, he said. The rupee touched an unprecedented 62.0050 per dollar on Friday before closing 0.3 per cent weaker from August 14 at 61.6550 in Mumbai, according to prices from local banks compiled by Bloomberg.

The RBI steps “might be perceived as being regressive and tantamount to quasi-capital controls,” Radhika Rao, an economist at DBS Bank in Singapore, wrote in a research report. “Despite being put forth as a temporary measure, uncertainty over more such action is likely to remain and possibly lead foreign investors to rethink plans to invest on fear of controls.” The currency fell 1.3 per cent this week. India’s financial markets were shut on Thursday for the Independence Day holiday.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 20 basis points from August 9, or 0.20 percentage point, and 23 basis points on Friday to 12.71 per cent, data compiled by Bloomberg show.

Limiting outflows

The RBI cut the amount local companies can invest overseas without seeking approval to 100 per cent of their net worth, from 400 per cent, according to a statement on August 14. Residents can remit $75,000 a year versus the previous limit of $200,000. The authority said banks accepting deposits after August 24 from Indians living abroad need no longer keep four per cent of the funds in cash and invest 23 per cent in government-approved securities.

India also boosted import duties on bullion on August 13 and banned inward shipments of gold in the form of coins and medallions to reduce the trade deficit. In a briefing in New Delhi on August 14, Mayaram said imported gold must be stored in government-mandated warehouses.

The government will seek to boost capital inflows with measures including allowing state-owned financial companies to issue “quasi-sovereign” bonds to finance long-term infrastructure investment, Finance Minister Palaniappan Chidambaram said on August 12.

The currency has weakened 26.5 per cent 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.

The yield on the 7.16 per cent government bonds due in May 2023 rose 39 basis points on Friday and 76 basis points this week to 8.88 per cent, according to prices from the central bank’s trading system. That’s the highest rate on a 10-year bond since November 2011.

source: khaleej times