A Friday of Fear saw the rupee hit an all-time low against the dollar, shares fall by their steepest in nearly two years and the price of gold scale a six-month high just when Indians wanted to start stocking up for the wedding season.
Strong signs of a recovery in the US are prompting global investors to invest there and pull out of emerging market share indices and currencies like the Sensex and the rupee. The Reserve Bank of India (RBI) has been doing its best to protect the currency, but its latest string of measures proved, once again, to no avail.
Friday’s falls came two days after the release of strong US employment data and measures by the RBI to restrict the amount of dollars Indians can spend abroad. Markets were closed on Thursday, so Friday was the first chance investors got to react.
And react they did. The rupee fell to 62.03 to a dollar before ending at 61.65, as investors gave their thumbs up to the US economy; the Sensex lost nearly 4%, or 769 points, driven primarily by worries about the impact of the new capital controls on Indian companies and foreign funds pulling out of India.
Overseas funds have pulled out $11.58 billion from India’s equity and debt markets in just over two months.
Finance minister P Chidambaram said the government was monitoring the situation. “A number of measures are being taken. Let’s wait to see what the first quarter growth rates are,” he said.
A sliding rupee is toxic. For a start, it means that India needs to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation.
And high inflation means that the RBI will hesitate to cut interest rates, a step needed to boost economic growth. So consumers need to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recedes because the economy is struggling.
“Earlier we used to budget for a month. Now we have to revise the budget almost every day,” said Manju Malik, a Delhi-based homemaker.
It’s not just households. Companies that import raw materials are hurting badly, a situation certain to further hurt economic growth. Students wanting to study abroad or families who wish to go overseas for a holiday might also be forced to reconsider.
Amid all this, gold prices hit a six-month high of R31,010 per 10 g. The government has warned Indians to cut down on gold consumption so as to keep the current account deficit -- the difference between dollar inflows and outflows -- under control.
This deficit may also limit the RBI’s ability to prop up the rupee by dipping into its foreign exchange reserves, which have fallen to $278 billion, enough to cover imports for just seven months.