Aug 16, 2013

    India reins in capital outflows to aid rupee

    INDIA increased efforts to stem the rupee's plunge and stop capital outflows that are pushing the economy towards its biggest crisis in more than two decades.

    The Reserve Bank of India, whose Governor Duvvuri Subbarao steps down next month, 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 Wednesday. Residents can remit US$75,000 (S$95,300) a year, versus the previous US$200,000 limit. Rupee forwards rose for the first time this week.

    Policymakers' moves since last month to tighten cash supply, restrict currency derivatives and curb gold imports have failed to arrest the rupee's slump to record lows as they struggle to attract capital to fund a record current-account deficit.

    The rupee has weakened 28 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.

    "I don't think this fixes India's problem," Mr Bhanu Baweja, the global head of emerging market cross-asset strategy at UBS AG, said. "The minute you restrict outflows, people will start legitimately speaking in terms of capital controls, although these are only on locals and not on foreign investors."