India’s Rupee Slides to a Record Low

India???s Rupee Slides to a Record Low
Indian 10-rupee banknotes
Photograph by Dhiraj Singh/Bloomberg

India is throwing its own taper tantrum.

The rupee sank to a record low, and stocks and bonds plunged on worries that India’s economy won’t be able to stem outflows of foreign capital as the U.S. Federal Reserve starts to withdraw stimulus—an outcome that would make it more difficult for India to finance its large current-account deficit. The government’s attempts to shore up the currency have yet to inspire much confidence. Like the old New York Telephone jingle posited, we’re all connected.

The rupee hit an unprecedented 62.0050 per dollar today before closing at 61.6550 in Mumbai, according to prices from local banks compiled by Bloomberg. India’s benchmark BSE Sensex equity index dropped 4 percent, the most in nearly two years. A key volatility gauge spiked 26 percent, the biggest increase in almost five years. The yield on India’s 10-year government bond is at its highest since November 2011.

Capital flight isn’t the only challenge India faces. The economy is growing at its slowest clip in 10 years. Inflation is uncomfortably high.

Faced with a current-account gap equal to 4.8 percent of gross domestic product, the Indian economy is simply desperate for outside investment. International investors have slashed their holdings of Indian bonds by $10 billion since May’s peak (when Fed Chairman Ben Bernanke started taper talk), to $28 billion. The rupee has weakened 27 percent in the past two years, its biggest fall since 1991, when India had to pledge gold reserves in exchange for loans from the International Monetary Fund.

On Wednesday, the Reserve Bank of India announced measures to limit foreign-currency outflows—cutting the amount local companies can invest overseas without seeking approval to 100 percent of their net worth, from 400 percent. Residents can now remit $75,000 a year, vs. the previous limit of $200,000. On Tuesday, India boosted import duties on bullion and banned inward shipments of gold in the form of coins and medallions to reduce the trade deficit; imported gold must now be stored in government-approved warehouses. Still, Economic Affairs Secretary Arvind Mayaram today said there is no intent to defend the rupee at a particular level.

The RBI moves “might be perceived as being regressive and tantamount to quasi-capital controls,” Radhika Rao, an economist at DBS Bank, 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.”

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