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Economy

Cutting Forex Outflows To Stem Rupee Fall

From the ET:

Indian authorities will this week discuss imposing restrictions on overseas investments by local companies and curbing pre-payments of foreign loans to conserve dollars if the recent trend of rupee weakening continues.

These measures are among a range of options to be considered by a sub-committee of the high-powered Financial Stability Development Council (FSDC), which is meeting on December 8. The falling rupee’s 18% decline since August has made it the worst-performing Asian currency this year.

This “imposing restrictions” is a retrograde step. Some of the reasons money continues to come in is through this route – as in, if you can borrow from abroad, you should be able to pay back early as well; investing abroad was hailed as a good thing, and now it’s being reconsidered, etc.

What does this tell you about India? That any decision, like FDI, can be stymied by some silly stupid rule later, with no respect for the implicit trust you had placed in policy. First we were told that it’s a matter of pride that Tata, Hindalco, Birla etc. invest and buy companies abroad; today they’re saying that further such investments may not be possible because of a temporary rupee fall! FDI is in, FDI is out.

The system runs on trust. The Indian government is working very hard to take away that trust. Yes, restrictions may temporarily seem to help, but it’s a mirage. What we really need to do is create a way for more dollars and foreign investment to flow in, not to restrict outflows.