Within 24 hours of Prime Minister Manmohan Singh’s Independence Day speech, which did not event mention Rupee remotely, Indian markets crashed after the domestic currency yet again weakened and breached the psychological mark of 62 per dollar.
The currency fell to a record low of 62.03 per dollar on Friday due to the fear of money flowing back into the US economy. Rupee finally closed weak at 61.65 per dollar after falling by 22 paisa. Experts believe that the currency recovered because Reserve Bank of India (RBI) sold dollar through public banks at 61.85 per dollar levels.
Country’s Finance Minister and the RBI till now were confident that the recent tightening measure would help curb the fall in the currency and reduce the current account deficit (CAD) but again all their measures proved worthless. All RBI did was suck out liquidity from the Indian markets and left the financial sector in a capital crunch and raised fears of capital control among foreign investors, who already were running away from the Indian markets.
Through the last month, Indian policy makers have taken multiple steps that included measure taken by the RBI on July 15 to drain out cash from the system along with raising short term interest rates. Very recently, RBI again announced capping of investments of Indian citizens and companies in overseas markets. RBI, on Wednesday, reduced the overseas direct investments (ODI) from 400 per cent of net worth to just 100 per cent of the net worth. Central bank also banned imports of gold coins and made it mandatory for domestic buyers to pay cash for the precious metal.
On the other hand, FM has been busy tackling the ever rising current CAD which stood at 3.6 per cent during January- March quarter. The aim was to reduce CAD that would then improve the global investment sentiment towards the country and eventually help attract more foreign direct investments (FDI) that would help stablaise the currency. Aiming to reduce CAD, the government had recently increased the custom duty on gold, platinum and silver to 10 per cent.
Government last month eased FDI norms which resulted in a muted response from the foreign investors and companies. Then it announced measures to attract near-term capital inflows, by spurring state-run companies to sell debt abroad and raising funds from Indians abroad. Even after all these measure, they failed to improve the investor sentiment. These steps were taken to attract foreign investors but the very FIIs are moving away as they have lost faith from Indian markets.
With all the measure falling short, prime concern now is that if the currency continues to fall, country’s CAD would only rise rather than falling to $70 billion, the number which FM had assured to achieve by the end of FY14. And if the Government is not able to contain CAD, hope of getting fresh investments from overseas remains bleak. As the country’s decision makers are finding it hard to stop the currency weakness, foreign investors and funds have been busy selling their holdings in view of booking what ever little profit they have or at least limit their losses.