Between 'Industry' and 'Finance'

The sharp plunge in the value of the rupee on Friday, 16 August 2013 and the following Monday, and further as the week unfolded crossing Rs 65 to the dollar as we go to press is perplexing, particularly so since it follows the announcement on 14 August of the institution of some controls on capital outflows. Why should the putting in place of restrictions on capital outflows, applicable only to residents, have caused the financial markets to panic? The Reserve Bank of India (RBI) now allows companies to invest overseas only up to 100% of their net worth compared to 400% of the same earlier, and resident individuals are now permitted to annually spend overseas only $75,000 compared to $200,000 earlier.

Of course, the present episode of the depreciation of the rupee began two years ago, in August 2011, and the sharp fall in the rupee’s value vis-à-vis the dollar (and other major currencies) has been underway since 19 June this year, after the chairperson of the US Federal Reserve (the Fed), Ben Bernanke announced that the Fed would soon be winding down its easy money policy. And this expectation has led to depreciations of the currencies of other emerging market economies, especially those with significant current accounts deficits on their balance of payments. Nevertheless, the most recent sharp depreciation of the Indian rupee needs to be explained, and this in the wake of the government and the RBI instituting the capital controls that we just mentioned.