Policymakers are looking increasingly alarmed as they fight the worst currency crisis in more than two decades, and more upsettingly there is no sign their antidotes are working.
The rupee pitched to a new lifetime low of 64 to the dollar on Monday, surpassing the previous record low of 63.30.
The rupee has lost 57 percent of its value against the US currency since it peaked at 39.40 rupees to the dollar in February 2008.
The currency’s strength began unscrambling when Lehman Brothers collapsed later that year, causing the global financial crisis.
But pressure on the rupee has mounted in the past two years as investor alarm over a slowing economy and a swelling current account deficit — the widest measure of trade — has grown.
The currencies of developing markets globally have fallen on the prospect that increasingly floating United States will soon roll back stimulus responsible for channelling huge investments overseas in pursuit of lofty yields.
However, analysts say that there are several home-made reasons are well for the falling rupee — falling to move fast enough on economic reform, a series of government corruption scandals, perceptions of policy paralysis and the record current account deficit.
As per reports, overseas funds have pulled out $11.58 billion from India’s stock and debt markets since June 1.
Investors worry that despite the long-term growth potential of the country of 1.2 billion people, things are not in shape in the interim period. As the rupee’s crisis has deepened, authorities have retorted with a list of measures to try to stem its decline and prevent a balance-of-payments crisis.
India has sore recollections of the 1991 economic crisis, when it failed to attract enough foreign currency and was forced to pledge 47 tonnes of gold as security for an International Monetary Fund loan in what was seen as a national embarrassment.
In the past few weeks, Indian policymakers have hiked short-term interest rates, declared plans to allow state firms to raise foreign funds abroad and restrained gold imports. They have also threatened to impose higher duties on imported electronic appliances such as fridges, which are made locally.
But their most recent step has fanned the inmost anxiety. The central bank sharply squeezed the amount of money individuals and firms can send abroad.
The move seemed like an upsetting throwback to the days in the early 1990s when Indians’ access to foreign exchange was strictly restricted.
Analysts say while the capital controls are only applicable to local individuals and firms, but the restrictions may raise doubts among overseas investors that they could be extended to foreign companies operating in India as well.
As per reports, under the new policy, Indian individuals can send just $75,000 out of the country annually, down from $200,000 — making it difficult to pay children’s overseas education expenses. Companies can invest overseas only 100 percent of their net worth, down from 400 percent — though the central bank says firms can ship out more money if they can specify a good reason for doing so.
The economy expanded last year at a decade-low of five percent and economists warn that this year have been grim with prospect of “stagflation” — a combination of high inflation and low growth.