The Indian rupee fell to a record low on Friday last week as central bank measures to tighten capital outflows and curb gold imports were seen as unlikely to prop up the currency and could even spark further selling if they spook foreign investors.
The rupee hit an all-time low of 62.03 to the dollar, breaching its previous record low of 61.80 hit on August 6.
India late on Wednesday last week restricted how much its citizens and companies can invest abroad to reduce pressure on the rupee, while targeting the current account deficit by banning imports of gold coins and medallions among other measures.
The efficacy of the steps remains in doubt, given outflows have already been declining this year and that they ultimately do not address the need to attract overseas investments to narrow a current account deficit that hit a record 4.8 percent of gross domestic product in the year ended in March.
Instead, traders fear the capital restrictions could adversely impact company profits and could lead to stronger capital restrictions that would scare off foreign investors at a time when the expected tapering of US monetary stimulus is already creating uncertainty in emerging markets.
“The steps taken so far only target residents, but if this raises expectations that they could potentially resort to capital controls targeted at non-residents, that could have adverse near-term implications for capital flows,” HSBC’s Chief economist for India and ASEAN Leif Eskesen said.
“It will, therefore, be critical to tread very carefully when it comes to capital controls, to anchor expectations, and also not use it as a substitute for more appropriate and effective measures,” Eskesen said in a note to clients.