A day after the Independence Day, the Queen’s durbar was in session.
To her left sat mauni baba with his head down and his eyes looking at his feet.
To her write sat the yuvraaj, the man who refused to grow up, fiddling with his new Apple iPhone.
Standing in front of her was the man who always wore the white veshti.

“So why is your veshti not spotlessly white today,” asked the Queen as she started the proceedings for the day.
“Oh, yesterday the wife decided to host an Independence day lunch and asked me to get two kgs of onions,” replied the man who always wore the white veshti, rather matter of factly.

“So?” asked the queen.

“Well, after buying two kgs of onion, I did not have enough money left to buy a Surf Excel sachet. You know, to wash one veshti properly takes one sachet.”

“Oh. I don’t know what this Power Man is upto. He doesn’t seem to understand that many elections have been lost on the price of onions,” lamented the queen.

“Yes madam,” replied the man who always wore the white veshti. “But he will win only if the onion prices keep going up.”

“Anyway so tell me what are we going about the rupee?” asked the Queen. “I gather this morning it even touched 62 to a dollar.”

“Rupee, rupee, rupee,” the yuvraaj said before the man who always wore the white veshti could say anything. “Robert keeps talking about them all the time.”

“Shh! Shutup,” said the queen. “Ah. I so wish that my son had married and my daughter had not.”
“Madam we are doing a lot of things to stop the fall of the rupee.”

“Like what?”

“On Wednesday I got the Reserve Bank to put in capital controls.”

“Capital controls”

“Yeah. Like Indian citizens can no longer buy property abroad.”

“That’s good. Anyway there is so much land in the country, why do they need to buy property abroad,” replied the queen. “They can always buy land in Gurgaon.”

“Like Robert, like Robert,” the yuvraaj interrupted again.

The man who always wore the white veshti ignored the interruption and carried on with his explanations.

“We also slashed the amount of money Indian citizens can remit abroad every year to $75,000, from the earlier $200,000. We have raised the import duty on gold and silver to 10%. We have also made it more difficult for Indian companies to invest abroad. All this to make sure that the demand for dollars goes down and the rupee recovers.”

“But it doesn’t seem to be helping,” said the queen. “Does it?”

“You know Ma, what this reminds me of?” the yuvraaj got into the conversation again.

“What beta?” asked the Queen lovingly.

“I recently read this lovely book called Through the Looking Glass, written by Lewis Carrol.”
“Good beta. You should read more instead of fidgeting around with that phone of yours all day long.”
“And the book had a Queen.”

“Really? Like me?”
“Yes, the Red Queen. And there is something that she says in the book that makes immense sense.”
“And what is that beta?”

“As the lines from the book go: “”A slow sort of country!” said the (Red) Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!””

“Ah, smart boy. Now I really know what is happening. We are not running fast enough. Also let the records of the meeting show that I said that. It’s such a smart thing to say.”

“Yes Madam. That’s what I have been trying to tell Subbu of the Reserve Bank,” said the man who always wore the white veshti, trying to save himself and pass on the blame.
“Call Subbu here at once,” roared the Queen.

“Yes Madam, in fact he is waiting outside,” said the man who always wore the white veshti.

So within five minutes Subbu was brought in. He looked very happy with not a care in the world.

“So Mr Subbu will you care to explain why are we not running fast enough when it comes to preventing the rupee fall,” asked the Queen.

“Madam, to be honest, there is nothing much we can do. The solution to the crisis is very simple. We need to cut down on our oil imports, our coal imports, our edible oil imports and our fertilizer imports. And I guess you know what will happen if we do that? At the same time we need to increase our exports manifold. And that won’t happen unless the physical infrastructure is improved. We need better ports, better roads and a better rail network. All this is not going to happen overnight, given that it has not happened in years. Also, Indian companies have borrowed too much money in dollars and all that needs to be repaid now. The NRIs are also looking to withdraw all the money they had deposited with Indian banks,” came a long answer from Subbu till he was stopped by the yuvraaj.

“In short we are screwed,” exclaimed the yuvraaj.

“So the demand for dollars will continue. The rupee will continue to be under pressure. We cannot sell dollars to control the rupee fall because we have just enough dollars to cover around six and a half months of imports. And that is a very low level. So we can only run to keep in the same place. In fact, we may not be able to do even that,” said Subbu, very matter of factly.

“Oh. But you could still do something about it?” asked the Queen.

“Madam, my time is up. I am going back to Telangana. I have bought a nice house in Nizamabad. And will spend the next few years watching the mythological movies of the late NT Rama Rao garu. It’s up to the Professor now,” said Subbu as he left the room.

“And why is the stock market down by more than 500 points this morning?” asked the ‘worried’ Queen again.
“Basically the foreign investors have now started to fear that we may not allow them to take their money back.”
“Oh, but why? I know of no such plans.”

“Madam, we have reduced the amount of money that Indians could remit abroad to $75,000 from $200,000. So the belief in the market is that our next step will be not allowing foreign investors to take their money back.”

“So?”

“So they are selling out of the stock market, converting their rupees into dollars and taking their money back, before we do any such thing. A similar things seems to be happening in the bond market.”

“Ah. All seems to be going wrong for me,” lamented the Queen. “I had such great plans for the yuvraaj.”
“Que Sera, Sera (Whatever Will Be, Will Be),” played on yuvraaj’s iPhone as the Queen decided to call it a day.

And finally the mauni baba woke up and said something.
“When we don’t know where we are going the journey is the reward.”

by FP Staff 54 mins ago

The Indian rupee today hit a record low of 61.92 against the US dollar against a previous all-time low of 61.80 despite measures from the central bank to prop up the currency.

Even the  BSE Sensex snapped a four-day winning streak and has plunged over 400 points in mid-morning trade to trade below its crucial psychological support level of 19000.

At 10:35 am, Sensex was down 408 points at 18959 and Nifty was down 139 points at 5600.

This is a clear indication that the desperate measures being taken by the government and the RBI have failed to calm both currency and stock markets.

India imposed restrictions on foreign exchange outflows and gold imports on Wednesday in a new attempt to defend the rupee, as a spike in inflation added pressure on policymakers to curb a crippling external deficit.

The depreciating rupee and efforts to control it is now beginning to touch the Indian upper middle class and all of corporate India. Companies until now could spend up to 400 percent of their networth abroad to acquire or expand.The RBI has brought this limit down to 100 percent of net worth. Indians could spend up to 2 lakh dollars a year to finance their children’s education or for any indulgence or even investment. Now they can spend 75,000 dollars a year and they can’t remit dollars to buy land abroad.

However, the RBI’s measures to support the falling rupee are proving to be counter-productive as it has created more panic on Dalal Street. The central bank might induce the very movement of money out of India that it is supposed to prevent as the capital control measures gives the impression that we are back to pre-1991 set of policies.

Even India Inc is irked by the fact that capital control measures were being introduced at a time when India is in dire needs of funding and investment.

“Ironic that we have controls on capital on Independence Day. Feels like the 1980′s. Well the silver lining is that I feel young again!” tweeted Anand Mahindra of Mahindra and Mahindra today.

Morgan Stanley believes the RBI’s capital control measures will make a marginal difference to the balance of payments  trend in the near term.

“We expect India to remain exposed to funding risks in the next few months as long as India’s current  account deficit remains higher than a more sustainable level of 2.5% of GDP and CPI inflation remains higher than 7%. As long as US Treasury yields keep rising, India will continue to see currency depreciation pressures,” the investment bank said in a report today.

“Even assuming more-than-expected inflows in long term flows in (FDI+ Loans + NRI deposits); there is excessive reliance  on “hot money“ flows to the extent of $21.3 billion,” said Elara Capital in a note titled “India Confronts the Impossible Trinity.”

The brokerage believes structural reforms like  shifting various FDIs from approval to automatic route framework  would be a ‘game changer ‘as these would not have to pass through the corridors of power in New Delhi or provincial assemblies.

Experts, however, believe that apart from policy measures, India needs some serious structural reform measures from the government.

And even though  though the intent behind capital controls on resident Indians is to stem dollar outflows at a time when the green back is in short supply, RBI has in effect  put brakes on overseas ventures and mergers and acquisitions of Indian businesses.

“It’s fire-fighting to save the rupee, but where does it leave my investments if the Indian government suddenly introduces new controls in the future that restrict me from repatriating my profits,” said Boston-based medical equipment manufacturer Harvey Kirpatrick told Firstpost earlier.

As Firstpost said earlier, ” RBI measures may curb short-term outflows, but they send a chilling message of serious crisis. The limited freedom that Indians—ordinary citizens and businesses—enjoyed on capital account convertibility is now being rolled back bit by bit. They can’t buy gold without paying more for it; they can’t buy property; and they can’t invest abroad easily to expand business opportunities. India Inc will not be happy.”

Even Business Standard noted that the RBI’s latest move gives the impression that our policy makers are helpless and are in dire straits similar to to 1991.

“It would be deeply unfortunate if a weak economy was driven to a crisis purely by the efforts of policy makers seeking to prevent it. The RBI should publicly give up its doomed defence of the rupee. After all, Finance Minister P Chidambaram is right when he told Parliament that the rupee’s level is fixed by various uncontrollable factors. But then he, and the Reserve Bank, should then stop trying to control it. No policy maker knows what the correct level of the rupee is; the market should be allowed to decide,” the BS article said. ( Read the entire piece here.)

The big question now is will foreign investors stop investing because they may worry about whether more capital controls will be introduced to limit outflows?

by Uttara Choudhury Aug 16, 2013

New York: Foreign investors seem to be increasingly wary about investing in India as the Reserve Bank of India battles to stem the rupee’s plunge and stop capital outflows that are pushing India toward its biggest crisis in more than two decades.

On Wednesday, RBI Governor Duvvuri Subbarao tightened rules on overseas investments to prop up the rupee. He cut the amount Indian companies can invest overseas without seeking approval to 100 percent of their net worth, from 400 percent. The move is expected to scuttle plans the Aditya Birla Group, Apollo Tyres and Cipla had to invest abroad. Indians can only remit $75,000 a year versus the previous $200,000 limit.

“It’s fire-fighting to save the rupee, but where does it leave my investments if the Indian government suddenly introduces new controls in the future that restrict me from repatriating my profits,” said Boston-based medical equipment manufacturer Harvey Kirpatrick.

“It really gives me pause. It’s worrying because the move reverses the relatively long-term trend of easing capital controls.”

For the first time since mid-2007, the advanced economies of Japan, the US and Europe are contributing more to growth in the $74 trillion global economy than the BRIC economies of China, India, Brazil, and Russia, according to Bridgewater Associates, which manages $120 billion in global investments.

“With the US economy on the rebound and flat growth in emerging markets, Western firms expect better returns back home,” Amrish Shah, who advises clients on mergers and acquisitions at Ernst & Young, told The Wall Street Journal.

India’s economic mismanagement and lack of growth have driven Western firms to sell their Indian investments. The falling rupee, which has remained weak despite a raft of measures by the RBI, has further eroded the profitability of many investments foreign firms have in India, expediting the departures.

“Investors fear that the rupee will continue to weaken, pulling unprofitable investments further into the red and leading to higher mark-to-market losses,” noted the Journal.

India’s gaping current account deficit has put a grinding pressure on the rupee which hit a record low of 61.80 against the dollar last week. It has fallen 31 percent in the past five years and 12 percent in the last six months against the dollar.

US insurer Berkshire Hathaway has decided to close its business selling online insurance in India two years after it was launched. Aviva PLC and New York Life Insurance Co. are also among insurers that are selling or have sold their India franchises. Royal Bank of Scotland also said on Friday that it would sell some of its Indian assets to a local bank.

In July, foreign investors like US retail giant Wal-Mart, and steel companies Posco and Arcelor Mittal all pulled back on Indian investment plans. ArcelorMittal dropped its plans to build a steel plant, worth $8.4 billion, in Odisha, over extended delays and problems in acquiring land. ArcelorMittal’s decision is one of the biggest foreign investor exits from India and the company was upfront about why it decided to leave.

“ArcelorMittal has not been able to acquire the requisite land for the steel plant, nor has it been able to ensure captive iron ore security, which is a necessary requirement for the project. Therefore, taking into account the current economic climate, ArcelorMittal has concluded it will no longer be pursuing its plans for a steel plant in Keonjhar,” said the company.

Unfortunately, the Indian government has failed to create a simple and clear policy foundation that would have sorted issues like mines allotment and land acquisition.

Uncertainty leading up to India’s elections, set for next year are also adding to concerns.

“There is just the huge confusion on what next. Any investor into India will be wise to wait because there will be volatility in policy that is short term in design,” said Krishna K Gupta, chairman of Massachusetts-headquartered global strategic advisory firm Romulus Advisory.

Foreign investors have soured on India at a time when Finance Minister P Chidambaram had been hoping to revive the economy’s mojo by attracting some $20 billion in new investment to fund the persistent current account deficit without depleting India’s $300 billion in foreign exchange reserves.

by R Jagannathan Aug 16, 2013

In what can only be seen as a panic move, the Reserve Bank of India (RBI) on Wednesday reversed the long-term secular trend of easingcapital controls by severely limiting the amount of money citizens can remit abroad, and businesses can invest in foreign ventures. Gold imports are being further squashed.

In recent months, industrialists ranging from Kumar Mangalam Birla to Cipla’s Yusuf Hamied to Apollo Tyres’ Neeraj Kanwar have been talking about investing abroad rather than in India due to a vitiated business climate here.

On Wednesday evening, the RBI put a spoke in their collective wheel by indicating that Indian companies can invest only amounts equal to their current net worth abroad through the automatic route – as against four times their net worth currently. If this norm had been in place 10 years ago, the Tatas would have thought thrice about buying Corus or Jaguar Land Rover, the Birlas would have found it tough to buy Novelis and Bharti Airtel may not have bought Zain. All these deals would have had to pass through tedious government clearances.

The RBI press release said that “this reduced limit would also apply to remittances made under the ODI (overseas direct investment) scheme by Indian companies for setting up unincorporated entities outside India in the energy and natural resources sectors. This reduction in limit, however, would not apply to ODI by Navratna PSUs, ONGC Videsh Ltd and Oil India in overseas unincorporated entities and incorporated entities, in the oil sector.”

In short, Indian companies that want to invest abroad—especially the smaller ones—cannot do so without bureaucratic vetting, while the public sector oil companies, already enfeebled by having to dole out subsidies, will be allowed to do what they find difficult.

In a related move, the RBI also de-liberalised the allowances for Indian residents who want to make remittances abroad. The remittance limit under the “Liberalised Remittance Scheme (LRS Scheme) has been slashed from US$ 200,000 to US$ 75,000 per financial year”. In recent years, many Indians have used the LRS route to invest in property and other assets abroad, but this will now be down to a trickle.

In fact, the RBI has gone one step further and simply banned the purchase of property abroad. The press release said: “While current restrictions on the use of LRS for prohibited transactions, such as margin trading and lottery would continue, use of LRS for acquisition of immovable property outside India directly or indirectly will, henceforth, not be allowed.”

These measures may curb short-term outflows, but they send a chilling message of serious crisis. The limited freedom that Indians—ordinary citizens and businesses—enjoyed on capital account convertibility is now being rolled back bit by bit. They can’t buy gold without paying more for it; they can’t buy property; and they can’t invest abroad easily to expand business opportunities. India Inc will not be happy.

To be sure, the RBI has also said that “the present set of measures is aimed at moderating outflows. However, any genuine requirement beyond these limits will continue to be considered by RBI under the approval route”. But when capital controls are being slapped back, no one will expect the RBI to be liberal with its clearances. The word “genuine” requirement will put discretionary power back in the hands of babus – something the nation has been trying to move away from.

The government has also banned the import of gold in the form of coins and medallions, and importers of gold will have to pay upfront before getting any of the yellow stuff. And at least 20 percent of gold imported will have to be re-exported, Arvind Mayaram,  economic affairs secretary, told newspersons. These steps follow the increase in gold import duties to 10 percent yesterday – up five-fold since last year.

It is not clear what impact all these measures will have on foreign sentiment and capital inflows. The big questions are:

#1: Will foreign investors now stop investing because they may worry about whether more capital controls will be introduced to limit outflows? Will money come in if it is not free to move out?

#2: Will NRIs now worry about their ability to move in and out of Indian bank deposits at will?

#3: Will more of the Indian demand for gold, already subject to high import duties, now shift to unofficial and illegal channels? The evidence is that it already has. Now smugglers will be the main beneficiaries.

#4: Will Indian business now clam up further? If they don’t want to invest in India, and can’t invest abroad, will they now just sit on their hands and wait for the crisis to blow over? Or a new government to come in?

#5: Will some exporters now begin underinvoicing exports in order to keep more of their dollars abroad, out of the clutches of the Indian state?

Make no mistake, the message coming out of North Block and Mint Street is a clear downer for India Inc. In terms of the sense of crisis, we are back to pre-1991 days.