Investors reeling from a violent sell-off in emerging markets over the past six months again fled the rupee as India’s currency hit fresh lows, prompting the government to curb gold imports and oil exports to stem the widening deficit, Bloomberg reports.
The government has raised import taxes on gold, while raising export levies on petrol and diesel in a bid to check a rapidly widening gap in the current account. The moves sent Reliance Industries and other energy exporters lower, shedding the benchmark as much as 1.7 percent. The rupee fell again.
The actions highlight how emerging economies, especially those with twin current account and fiscal deficits, are increasingly facing pressure on their currencies as aggressive rate hikes by the US Federal Reserve fuel outflows. Despite holding the world’s fourth largest stock of reserves, the rupee has hit a series of record lows in recent weeks. The Indonesian rupiah, Asia’s other top-performing currency, fell to a two-year low on Friday.
New Delhi’s move also underscores the economic challenges facing Prime Minister Narendra Modi’s government as inflation in the world’s sixth-largest economy accelerates and external finances worsen. The central bank is fighting to slow the currency’s slide, and the rupee’s rampant depreciation will exacerbate price pressures and could prompt more rate hikes that will weigh on growth.
The measures “are aimed at reducing the looming pressure on the current account deficit and thus the currency,” said Madhavi Arora, chief economist at Emkay Global Financial Services. “Complementary policy efforts on both the fiscal and monetary sides effectively reflect the looming pain in the balance of payments deficit this year.”
As India’s central bank tries to pare the rupee’s 6 percent fall this year, banks reported dollar shortages as investors and companies rushed to exchange the rupee for other assets or pay for imports. The latest measures were prompted by a sudden surge in gold imports in May and June, the Treasury Department said on Friday.
The government has raised the import duty on gold to 12.5%, reversing a reduction imposed last year. Higher taxes on petrol and diesel shipments sent shares of Reliance Industries, a major exporter, down as much as 8.9%.
India is the world’s second-biggest consumer of gold, and local futures rose as much as 3 percent in Mumbai, the biggest intraday jump in nearly four months, on higher import costs.
Finance Minister Nirmala Sitharaman said on Friday that India is seeking to discourage gold imports as it helps maintain the currency. He added that “emergency times” called for such measures, including the imposition of an emergency tax on fuel exports.
“The challenges come from the same source, which is higher commodity prices,” said Rahul Bajoria, senior economist at Barclays Bank Plc. “India can neither find supply onshore nor will it be able to reduce its oil consumption. This makes the whole situation much more unpredictable both in terms of how it will develop and how long it will continue.”
For the broader fuel market, a decline in Indian exports could further tighten global markets struggling with reduced supply from Russia and rising post-pandemic demand.
Friday’s measures highlight that the central bank has a tough battle to fight on the foreign front in the coming months. RBI Governor Shaktikanta Das said the central bank is using a multi-pronged intervention approach to minimize real dollar outflows and will not allow an uncontrolled depreciation of the rupee.
And while investors have been wary of emerging market stress since Sri Lanka’s struggle with a dollar crisis that led to hyperinflation, the RBI has nearly $600 billion in foreign exchange reserves. But those reserves are being depleted as the central bank steps up its fight to halt the rupee’s slide amid capital outflows and a current account gap expected to double this year.
“Investors should expect the currency to continue to depreciate,” said Arvind Chari, chief investment officer at Quantum Advisors Pvt. in Mumbai. “Will more taxes on exports affect corporate activity? Maybe not in the short term, but it could in the medium and long term.”