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Indian Prime Minister vows not to impose capital controls then imposes capital controls

Indian Central Bank

Source: Live Mint

 

Since the rapid fall of the Indian Rupee, which has fallen nearly 20% against the US dollar this year, the Indian government and Central Bank have been struggling to stop the slide.  Their attempts have had some success so far, but it looks like they are resorting to capital controls going against previous promises not to do so.

 

In a bid to protect a depreciating rupee against the dollar, the Reserve Bank of India (RBI) on Wednesday partially rolled back the currency’s convertibility and imposed capital controls on resident Indians. The objective is to stem dollar outflow from the country at a time when the greenback is in short supply, but the decision effectively undoes key reforms of the past two decades that removed capital controls.

The rupee ended at 61.44 a dollar on Wednesday, its lowest closing in history, down 0.40% from its previous close of 61.20. The Indian currency opened at 61.47 and touched a high of 61.26 and a low of 61.60 in intra-day trade. Since January this year, the rupee has weakened 10.50% and lost the most among Asian currencies after the Japanese yen.

The currency hit a record low of 61.81 to a dollar on 6 August.

Following up on the finance ministry’s measures to attract dollars in the country, RBI said resident Indians cannot remit more than $75,000 a year, a steep rollback from $200,000 permitted earlier.

While this will not impact casual travellers and business visitors, individuals who have bought properties overseas and been paying equated monthly instalments, will be hit. Many resident Indians had bought properties overseas, particularly in South Asian countries in the aftermath of global financial crisis in 2008 as the governments of those countries wooed global investors to their domestic realty markets, offering residential status and loans from domestic banks to invest in properties priced $1 million and above.

RBI further said use of dollars under liberalised remittances scheme, under which up to $75,000 can be invested outside the country, cannot be used for buying immovable property outside India “directly or indirectly”.

Read the full story from Live Mint.

  

How will it not impact casual travelers and business visitors?  Here’s a recent letter from Citibank in the United Arab Emirates instructing its customers on cash restrictions in India.  See below:

 

Citibank Notice to India

 

Indian officials, however, have a different definition of capital controls…

 

India on Friday assured foreign investors it is not contemplating capital controls as a step to stabilize the falling Indian rupee.

Prime Minister Manmohan Singh told India’s Parliament that the rupee’s sudden decline was a shock, but his government will not address by it imposing capital controls or by reversing economic reforms.

India’s stock market has dropped more than 10 percent in the past three months and the rupee has lost a sixth of its value against the dollar this year. Much of the currency’s fall has been in the past month.

Singh said the rupee’s weakness largely stems from India’s large current account deficit, caused by huge imports of gold and higher costs of crude oil and coal imports.

The government has raised gold taxes and hiked deposit rates to combat the outflow of money. It also put new limits on the amount of money Indian companies and individuals can send abroad, sparking concerns such controls would be extended to foreigners with investments in India.

Read the full story from Yahoo News.

  

If these measures aren’t capital controls, what are they?