Here are ten things you need to know about why the currency has depreciated despite RBI measures • The main reason for the rupee to fall 15 percent in the last three months is India’s wide current account deficit. Fears of QE3 tapering aggravated the slide. In order to arrest the volatility in the forex market, the RBI started tightening its monetary policy July 15. It signaled increase in short-term rates by hiking marginal standing facility rate by 200 basis points. On 23 July and 8 August, it followed up with further tightening measures. All this while, the rupee continued to decline and interest rates kept going up. On 20 August, the RBI signaled a reversal of tightening policy. According to Macquarie, the Reserve Bank of India is sending confusing signals on monetary policy, due to which rupee will continue to depreciate. Last week, RBI restricted how much Indian citizens and companies can invest abroad to reduce pressure on the rupee, while targeting the current account deficit by banning imports of gold coins and medallions among other measures. • The RBI also eased some of the rate limits for deposits targeted at non-resident Indians (NRIs), though that is also seen as unlikely to attract inflows in the near term given that NRI deposits have seen net withdrawals of $1.1 billion in May and June, according to DBS. • Efficacy of the steps remains in doubt, given outflows have already been declining this year and that they ultimately do not address the need to attract overseas investments to narrow a current account deficit that hit a record 4.8 per cent of gross domestic product in the year ended in March. • Instead, traders fear the capital restrictions could adversely impact company profits and could lead to stronger capital restrictions that would scare off foreign investors at a time when the expected tapering of US monetary stimulus is already creating uncertainty in emerging markets. • The intensity of the fall is surprising but the fall in itself was not surprising, said Sanjay Dutt of Quantum Securities. “Some of the measures taken by the RBI etc, haven’t seemed to have gone down well with the market participants who feel they are very inward looking and retrograde in a manner,” he told CNBC-TV18. • ”The steps taken so far only target residents, but if this raises expectations that they could potentially resort to capital controls targeted at non-residents, that could have adverse near-term implications for capital flows,” HSBC’s Chief economist for India and ASEAN Leif Eskesen said. “It will, therefore, be critical to tread very carefully when it comes to capital controls, to anchor expectations, and also not use it as a substitute for more appropriate and effective measures,” Eskesen said in a note to clients,” he added. • A Reuters poll showed short positions in the Indian rupee have hit the highest in two months amid sustained doubts over policymakers’ ability to stabilise the currency. Measures to restrict capital outflows come as overseas investments from India had already been on the wane, averaging a monthly $400 million in the first half of the year from $710 million in 2012, according to DBS data. • To prop up the rupee in the near-term, markets would need assurances that India can attract foreign flows in an increasingly difficult global environment. Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May. • The government has also raised import taxes on gold and silver in an attempt to narrow the burgeoning current account deficit. The import duty on gold was hiked to a record 10 percent, the third such increase in eight months, while duty on silver was hiked from 6 percent to 10 percent. The excise duty on gold bars was hiked to 9 per cent from 7 percent. The hike in duties came after Chidambaram said the government was looking to contain gold imports at 850 tonnes this fiscal year, after imports of 950 tonnes last year. However, as Firstpost said earlier, Chidambaram may be forced to introduce more curbs on gold if the 850-tonne limit is to be adhered to. During the first quarter, global demand for gold fell 12 percent to 856.3 tonnes against 974.6 tonnes in the corresponding period last year. But in India consumer demand for gold in India jumped 71 percent to 310 tonnes, compared with 181.1 tonnes in the year-ago period despite repeated increases in import and excise duties by the government this year.
Posted on: Thu, 22 Aug 2013 07:06:18 +0000