It was a black Friday for the Indian economy, which experienced a bloodbath on the bourses, a free fall of the rupee to a record low and a surge in gold prices with nervous investors rushing for ‘safe haven’ cover in a highly volatile and uncertain environment.
Much as the government, in tandem with the Reserve Bank of India (RBI), had striven hard earlier in the week to stabilise the rupee by restricting dollar outflows and placing fresh curbs on gold imports with the express objective of reining in a widening current account deficit (CAD), the result during the course of Friday’s trading session was a triple whammy.
Perhaps fuelled by rumours spread by bear operators, coupled with news of an improvement in the United States economy and a consequent early tapering of quantitative easing (QE), nervous investors also harboured fears of a return of capital control measures in the domestic economy. Such was the Molotov cocktail that the Bombay Stock Exchange’s Sensex plunged by 769.41 points — its lowest point in four years — to leave investors poorer by over Rs. 2 lakh crore.
The huge outflow impacted the rupee, in turn, and the local currency momentarily breached the 62-mark to the U.S. dollar for the first time, falling to 62.03, before recovering to close at a new low of 61.65. Alongside, investors appear to have turned to gold and the price of the yellow metal surged by Rs.1,310 — the most in two years — to reach Rs. 31,000 per 10 grams here.
On August 14, the RBI announced stringent measures, which included curbs on Indian companies investing abroad and on outward remittances by resident Indians. Perhaps this had instilled fears in the market of more curbs being in the pipeline and the government and the RBI were forced to go into fire-fighting mode to bring about calm saying that reverting to the capital control regime was not on its radar whatsoever.
Finance Minister P. Chidambaram wondered why the market should be so sensitive to data flowing from the U.S. “When calm is restored in the market, people will begin to understand that Indian market indicators must basically reflect Indian market conditions. They should not be so sensitive to data coming out of the U.S.,” he said on the sidelines of an event here.
The Finance Minister pointed out that nothing had happened in the Indian economy between Wednesday and Friday morning. “Nevertheless, the markets have taken a hit and that is reflected in the rupee also. We have taken [and are continuing to take] a number of measures… Let’s wait to see what the first-quarter growth rates are.”
Earlier in the day, while RBI officials in Mumbai blamed “unwarranted rumours” about controls on FII money for the tailspin on both the national bourses and in the value of the rupee, Finance Ministry officials were at pains to explain that there was no basis for any fear of fresh curbs.
While the RBI asserted that India had no record of keeping controls on FII money and the capital outflow measures announced on August 14 were in no way bringing back the control regime, Economic Affairs Secretary Arvind Mayaram sought to assure reporters in no uncertain terms: “There is no question of us putting any restriction on outflows, which are commercial in nature… There is no control of outflows of dividends, profits, royalties or on any kind of commercial outflows which happen in the normal course.”
