Investors reeling from the sharp selloff in emerging markets over the past six months fled the rupiah again as India’s currency hit new lows, prompting the government to cut gold imports and oil exports to stop a growing deficit.
The government has raised import taxes on gold, while increasing levies on gasoline and diesel exports in a bid to control a rapidly widening current account gap. These moves brought down Reliance Industries Ltd. and other energy exporters, pushing the benchmark down 1.7%. The rupee fell again.
Equities underscore how emerging economies, particularly with dual current account and fiscal deficits, are increasingly facing pressure on their currencies as sharp rate hikes by the Federal Reserve accentuate outflows. Despite having the fourth largest reserve pile in the world, the rupee has hit a succession of record highs in recent weeks. The Indonesian rupiah, Asia’s other high-yielding rupiah, fell to its lowest level in two years on Friday.
Policymakers in many emerging markets face tough choices as they battle soaring inflation and capital flight as the Fed tightens policy: raise rates and risk hurting growth, spend reserves that have taken years to build up to defend currencies, or simply walk away and let the market turn its course.
New Delhi’s decision also underscores the economic challenges facing Prime Minister Narendra Modi’s government as inflation in the world’s sixth-largest economy accelerates and external finances deteriorate. The central bank has been battling to slow the currency’s decline, and the runaway depreciation of the rupiah will add to price pressures and could spur more rate hikes that weigh on growth.
The measures “are aimed at reducing the looming pressure on the current account deficit and hence on the currency,” said Madhavi Arora, chief economist at Emkay Global Financial Services. “Complementary policy efforts on the fiscal and monetary side essentially reflect the looming pain of the balance of payments deficit this year.”
As the Reserve Bank of India sought to smooth the rupee’s 6% decline this year, banks signaled dollar shortages as investors and businesses rushed to swap the rupee for other assets or to pay for imports. The latest moves were spurred by a surge in gold imports in May and June, the finance ministry said on Friday.
The government raised the import duty on gold to 12.5%, reversing a drop last year. Higher taxes on gasoline and diesel shipments sent shares of Reliance Industries, a key exporter, down as much as 8.9%.
India is the world’s second largest consumer of gold and local futures rose 3% in Mumbai, the biggest intraday jump in nearly four months, due to higher import costs.
Finance Minister Nirmala Sitharaman said on Friday that India was seeking to discourage gold imports as it helps preserve currencies. She added that “extraordinary times” call for such measures, including the imposition of a one-off tax on fuel exports.
“The challenges come from the same source, namely rising commodity prices,” said Rahul Bajoria, senior economist, Barclays Bank Plc. “India can neither source onshore nor reduce oil consumption. This makes the whole situation much more unpredictable, both in terms of how it plays out and for how long.”
For the broader fuel market, a drop in Indian exports could further tighten global markets which are struggling with reduced supply from Russia and rising post-pandemic demand.
Friday’s measurements highlight that the central bank will have a tough fight on the external front in the months ahead. RBI Governor Shaktikanta Das said the central bank is using a multi-pronged intervention approach to minimize real dollar outflows and will not allow runaway depreciation of the rupee.
And while investors have been put under scrutiny from stress in emerging markets by Sri Lanka’s struggle with a dollar crisis leading to hyperinflation, the RBI has nearly $600 billion in foreign exchange reserves. But those reserves are running low as the central bank steps up its fight to halt the rupiah’s slide amid capital outflows and a current account deficit that is set to double this year.
“Investors should expect the currency to continue to depreciate,” said Arvind Chari, chief investment officer at Quant Advisors Pvt. in Bombay. “Will the increase in export taxes have an impact on business activity? Maybe not in the short term, but it could be done in the medium to long term. »