Re falls 1% on capital control fears

Brazil’s latest move to curb capital inflows weighed on the rupee as traders feared similar action from the Indian government.

The rupee fell over 1 per cent to close at 46.69 against the dollar, the lowest since November 6, when it hit 46.82, Bloomberg data showed. The Indian currency, which closed at 46.22 against the dollar yesterday, traded in the 46.37-46.69 band today.

Fears of capital controls and a stronger currency also weighed on stock markets with the Bombay Stock Exchange Sensitive Index, Sensex, falling 1.3 per cent to 16,785.65, the steepest decline since November 3. The S&P CNX Nifty Index on the National Stock Exchange lost 1.3 per cent to 4,989.

Yesterday, in a fresh effort stem the rise of the real, Brazil said it would tax shares of local companies that were traded as American depositary receipts. Last month, it had imposed a tax on foreign exchange inflows.

With other governments also putting in place curbs on inflows (see box), there is an expectation that the Indian authorities will also follow suit, especially with foreign institutional investors having pumped in $15.4 billion into the stock markets this year. This has helped the Indian currency climb from a life-time low of 52.18 against the dollar in early March.

In a note, Citi economists Rohini Malkani and Anushka Shah said apart from rebuilding foreign exchange reserves, there could be an effort to allow the rupee to appreciate to partly offset the inflationary pressure. “Although we do not expect that India will impose ‘punitive controls’, one could see a reversal of some measures taken last year. This could include tightening ECB (external commercial borrowing) and banking capital norms, reducing interest rates on NRI deposits, and encouraging capital outflows,” they said.

The government, however, said there were no plans to impose any controls at the moment. “As the situation evolves, we will see what needs to be done. As of now, inflows are not a cause for serious concern,” Finance Secretary Ashok Chawla told reporters in New Delhi. Bankers said the rupee was expected to appreciate further. By March 2010, HSBC and Standard Chartered expect the rupee to breach the 45 level against the US dollar.