Rupee Hits a Record low of 62 per Dollar

Mumbai : The rupee fell to a record low on Friday as central bank measures to tighten capital outflows and curb gold imports were seen as unlikely to prop up the currency and could even spark further selling if they spook foreign investors. The rupee hit an all-time low of 62.03 to the dollar, breaching its previous record low of 61.80 hit on August 6. Meanwhile, the BSE benchmark index Sensex declined by over 400 points in early trade, as funds and retail investors booked profits after recent gains amid mixed trend on other Asian bourses. 

 The 30-share index, which has gained nearly 703 points in the previous four sessions, fell by 409.03 points, or 2.11% to 18,958.56 with all the sectoral indices led by consumer durables, banking and realty coming under pressure. Brokers said besides profit-booking by participants after four sessions of gains and a mixed trend on the Asian bourses in line with overnight losses on the US markets, led to the decline in the benchmark Sensex. 

India late on Wednesday restricted how much its citizens and companies can invest abroad to reduce pressure on the rupee, while targeting the current account deficit by banning imports of gold coins and medallions among other measures. The efficacy of the steps remains in doubt, given outflows have already been declining this year and that they ultimately do not address the need to attract overseas investments to narrow a current account deficit that hit a record 4.8 percent of gross domestic product in the year ended in March. 

Instead, traders fear the capital restrictions could adversely impact company profits and could lead to stronger capital restrictions that would scare off foreign investors at a time when the expected tapering of U.S. monetary stimulus is already creating uncertainty in emerging markets. "The steps taken so far only target residents, but if this raises expectations that they could potentially resort to capital controls targeted at non-residents, that could have adverse near-term implications for capital flows," HSBC's Chief economist for India and ASEAN Leif Eskesen said. "It will, therefore, be critical to tread very carefully when it comes to capital controls, to anchor expectations, and also not use it as a substitute for more appropriate and effective measures," Eskesen said in a note to clients. 

Indian financial markets were closed on Thursday for a national holiday. The weakness on Friday also reflected a firmer dollar in Asia amid uncertainty about the US Federal Reserve's stimulus withdrawal after upbeat US jobless claims data on Thursday suggested an early end to the Federal Reserve's asset purchases. The benchmark 10-year bond yield surged 16 basis points to 8.66% from its previous close after US Treasury yields jumped to two-year highs. Measures to restrict capital outflows come as overseas investments from India had already been on the wane, averaging a monthly $400 million in the first half of the year from $710 million in 2012, according to DBS data. To prop up the rupee in the near-term, markets would need assurances that India can attract foreign flows in an increasingly difficult global environment. 

Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May. India last month unveiled plans to further ease restrictions on foreign direct investment (FDI) in sectors such as telecoms and defence. Although the government hopes its latest reforms attract long term capital flows, previous measures have had mixed results. FDI fell to $36.9 billion in the fiscal year ending in March from $46.6 billion the previous year. The RBI on Wednesday also eased some of the rate limits for deposits targeted at non-resident Indians (NRIs), though that is also seen as unlikely to attract inflows in the near term given that NRI deposits have seen net withdrawals of $1.1 billion in May and June, according to DBS.