India restricted oil exports and gold imports in an all-out effort to cool the rupee, which hit a new low on Friday. Investors reeling from the six-month wild sell-off in developing markets once again fled the rupee, leading the government to cut gold purchases and oil exports to stem a growing imbalance.
To contain a rapidly growing current account deficit, the government raised import duties on gold while increasing charges on gasoline and diesel exports. The changes pushed Reliance Industries Ltd. and other energy exporters to fall, causing the benchmark to fall by as much as 1.7%. The rupee fell again.
The stocks show how developing countries, especially those with simultaneous current account and fiscal deficits, are increasingly struggling with currency problems as aggressive Federal Reserve rate hikes amplify outflows. The rupee recently fell to a series of all-time lows despite having the world’s fourth largest reserve accumulation.
The Indonesian rupiah, Asia’s other high-yielding currency, fell Friday to its lowest level in two years.
As part of its efforts to rein in a rapidly growing exchange gap, the administration raised import duties on gold while raising taxes on gasoline and diesel exports. Shares of Reliance Industries Ltd. and other energy exporters fell due to restrictions, sending the benchmark down as much as 1.7%. The currency fell again.
As inflation rises and foreign finances deteriorate, the rupee has fallen to a series of record lows, reflecting the economic problems facing Prime Minister Narendra Modi’s government. The runaway depreciation of the rupiah will intensify price pressures and could trigger future rate hikes, which will weigh on GDP. The central bank has tried to stop the depreciation of the currency.
“The biggest near-term challenge for policymakers is supporting inflationary expectations,” said Kotak Mahindra Bank chief economist Upasna Bhardwaj. “Inflationary pressures will not diminish unless fiscal policy is tightened in line with monetary tightening.”
In the fiscal year ending March 31, India’s current account deficit (the broadest measure of trade) is expected to reach 2.9% of GDP, about double the level recorded in India. previous year, according to a Bloomberg survey conducted in late June.
Banks reported dollar shortages as everyone from investors to businesses rushed to trade rupees, despite efforts by the Reserve Bank of India to halt the rupee’s decline. The currency has fallen 6% against the dollar this year due to rate hikes by the Federal Reserve, driving capital out of developing countries.
Many emerging market policymakers face tough options: actively raise borrowing costs to protect currencies and run the risk of undermining development; spend the reserves accumulated over time to intervene in the foreign exchange markets; or just step back and let the market fend for itself.
Policymakers in many developing countries face tough decisions as the Fed tightens monetary policy: raise interest rates and risk hurting GDP; use reserves accumulated over time to protect currencies; or simply step back and let the market take its course.
New Delhi’s decision also draws attention to the economic problems facing Prime Minister Narendra Modi’s administration as the world’s sixth-largest economy faces rising inflation and deteriorating external finances. The central bank has been scrambling to halt the rupiah’s decline, and a sharp drop would add to price pressures, possibly lead to further rate hikes and negatively impact GDP.
The measures “are aimed at alleviating the impending pressure on the current account deficit and therefore on the currency”, according to Madhavi Arora, chief economist at Emkay Global Financial Services. “Complementary policy actions on both fiscal and monetary sides are essentially reflected in the projected pain of the balance of payments deficit this year.”
Banks reported shortages of dollars as investors and businesses rushed to convert rupees into other assets or pay for imports, despite efforts by the Reserve Bank of India to limit the 6% fall in the rupee this year. According to the Ministry of Finance on Friday, an increase in gold imports in May and June was the driver of the new restrictions.
According to a notification dated June 30, the government raised the import tariff on gold from 7.5% to 12.5% on Friday, reversing a decline last year. Higher levies on petrol and diesel exports have pushed Reliance Industries Ltd.
The administration raised import duties on gold to 12.5%, reversing a previous reduction. Rising tariffs on gasoline and diesel exports sent shares of Reliance Industries, a major exporter, down as much as 8.9%.
India is the world’s second largest consumer of gold due to rising import prices, and local futures soared 3% in Mumbai, the highest intranet gain in more than four months . On Friday, Finance Minister Nirmala Sitharaman said India was trying to prevent gold imports to save foreign money. She noted that “exceptional times” require measures such as imposing an exceptional tax on gasoline exports.
“The problems all come from the same place: rising commodity costs,” said Rahul Bajoria, senior economist at Barclays Bank Plc. “India will also not be able to locate supplies onshore and we will also not be able to reduce our oil consumption.” This makes the whole storyline much more uncertain, both in terms of how it plays out and how long it lasts.
A decline in Indian exports could put further pressure on global markets which are already facing lower supply from Russia and rising post-pandemic demand.
The measures announced on Friday focus on the central bank’s next external battle. RBI Governor Shaktikanta Das said the central bank is taking a multi-pronged intervention approach to reduce real dollar outflows and will not allow the rupee to arbitrarily depreciate.
With investors wary of tensions in emerging markets due to Sri Lanka’s struggle with a currency constraint that has led to hyperinflation, the RBI has nearly $600 billion in foreign exchange reserves. However, these reserves are shrinking as the central bank steps up its efforts to stem the rupiah’s slide amid capital outflows and a current account imbalance that is expected to triple this year.
Investors should expect the currency to continue falling,” said Arvind Chari, Chief Investment Officer of Mumbai-based Quant Advisors Pvt. business activity?Perhaps not in the short term, but in the medium and long term.
edited and proofread by nikita sharma