Black Friday for markets

It is a black Friday. Markets have crashed following a record fall of the rupee against the dollar and fearing early rollback of US monetary stimulus. Foreign investors have resorted to heavy selling of stocks resulting in sinking of Sensex by 769 points, and the rupee reported an all-time low of 62 a dollar. Stock markets, which are mostly dominated by foreign investors, fell beyond expectations. Although the RBI and the government had taken a slew of measures to contain the rupee slide, they failed; and the recent measures on restricting forex spending by individuals and companies investing overseas have infuriated the markets as they looked like a regressive measure and led to further fall of the rupee.

For instance, the Reserve Bank had reduced the investment limit for Overseas Direct Investments (ODI) from 400 per cent of net worth to 100 percent of net worth through the automatic route. The central bank also reduced the limit under the liberalised remittance scheme from $200,000 to $75,000. The RBI is effectively curtailing Indians from investing abroad. But, the foreign investors are worried a lot by the banking regulator’s move and they see some invisible restrictions in store on capital reverse flow. On the one hand, the government is trying to attract foreign investment and, on the other hand, imposing controls even on capital flow into the country. Interestingly, instead of strengthening the rupee, these measures are working against growth.

In a way, market operators and foreign investors look to India as an underperformer, while the signals they get from the recovery of the US economy, in particular, and the Western recovery, in general, led to Friday’s consequence of shattering the markets. They say, there is still a large current account deficit hanging besides a number of unresolved issues plaguing the country’s economy. Of course, the government has been sending the right signals for quite some time, but the results of these measures could be seen in the medium-term, by which time the government of the day should give way to a new one. Foreign investors and big traders say all these measures must also get enough support from serious actions in terms of reforms and others methods. And now, all these short-term measures that the RBI or the government is taking are considered only as symptoms that India is in a bit of a ‘trap’. Thus, the market people do not believe that all these happenings are moving towards good.

The developments show that the RBI is in panic over the rupee fall. Of course, the rupee is now trading at an all-time low versus the US dollar, but the country, it was reported, had enough foreign exchange reserves supporting exports for about seven months; external debt to the GDP is also comfortable over 20 per cent; thus the country is comfortable now in terms of balance of payment. In fact, the central bank has already imposed restrictions on gold imports, tightened liquidity conditions, and restrictions on currency markets. Even as these measures would not amount to curbing flow of money (both ways), there is suspicion that restriction on capital flow would bring down the rupee. Hence, the government now may have to send a clear message to foreign investors that there will be no controls on foreign investments in India, and they can bring capital and also move it back whenever they so desire.