The RBI has now introduced more capital controls in order to protect the rupee from sliding further. The Rupee closed at about Rs.61.4 to a dollar on Wednesday. In an announcement, they have taken many measures to try and curb the outflow of dollars.
You can invest only $75K abroad per year, down from $200K
The earlier limit of $200K was perhaps too much? But it really wasn’t that much, and this limit change will hurt some individuals who’d buy. Also this is now the limit for gifts, for loans to NRIs by family and for outward remittances. And then:
You can’t buy property abroad
Yes, the RBI has stopped any residents from buying immovable property abroad. Indians were a small but growing set of people buying houses in the west where prices had dropped and are typically better and lower cost than most cities in India. That will no longer be allowed.
Companies can invest only 100% of networth, down from 400%
If they want to do more they have to get RBI approval.
But PSUs (Navratnas) can continue. This is blatant stupidity; how can you favour a government owned organisation over a private one for investing abroad?
No more gold coins or medallions
Yes, these are banned. I don’t know why. I suppose because banning them will help increase small ticket smuggling, and we need to let that happen along with all the big ticket smuggling happening recently.
Gold Players Need to Pay Upfront
Gold must be paid for upfront. No credit can be availed for the import. However I suppose banks can lend to companies against the gold later?
20% of all imports of Gold must be exported
This was explained earlier as well, and it continues. It’s a complex, micromanaged calculation, but it means that until 20% of any incoming consignment is reexported, the buyer won’t be able to take on fresh imports.
NRI deposits can be paid interest rates higher than domestic deposits
That’s in a separate circular and applies for deposits for 3 years or more. In addition, 3-5 year Forex deposits will get paid upto LIBOR+4% (from LIBOR+3%). Further, any new deposits (FCNR or NRE) with 3 years maturity or more won’t be part of NDTL – so no CRR and SLR requirements will apply. And, on such deposits, the priority sector lending restrictions will not apply either.
Impact: The capital controls will cause a flight of all foreign assets which will fear that eventually we will not allow people to take out rupees. This is clinically insane and a step taken in haste.
The gold import bits will encourage smuggling. It will also hurt some gold jewellers but to a small extent.
NRI deposits might increase marginally. But the fear of their not being allowed to take their money back through sudden statements like this will remain.
Overall, such steps are retrograde and bad for our economy. They are action but they are terrible action and it will take years to regain the confidence of people abroad. The rupee will weaken before it strengthens, though there may be a knee-jerk upward reaction on Friday.
However, watch for all equities to hurt in the short term.