Chidambaram: Pep talk
Aug. 16: The government and the RBI today assured rattled investors that the country was not reverting to a capital control regime — the fear of which today spooked stock markets, sent the rupee reeling to new lows and pushed gold prices up to record highs.
On a day the Sensex fell nearly 770 points and the rupee breached 62 to a dollar on concerns among large investors of capital curbs, the government and the RBI went into fire-fighting mode, assuring them there was no move to check the repatriation of funds by FIIs.
“They are saying that a capital control is coming in... There is no question of us putting any restriction on outflows which are commercial in nature,” economic affairs secretary Arvind Mayaram said.
He further said: “There is no control of outflows of dividends, profits, royalties, or on any kind of commercial outflows which happen in the normal course”.
Top sources in the Reserve Bank blamed “unwarranted rumours” about controls on FII money to the drop in the Sensex and the rupee.
India, RBI sources said, had no record of keeping controls on FII money and the capital outflow measures announced on Wednesday were in no way bringing back the control regime.
Finance minister P. Chidambaram said the fundamentals of the economy were strong and that calm would return to the Street soon.
On stock prices and the rupee taking a hit because of global developments, he said, “The fundamentals of the economy have not changed… Jobless claims in US do not impact fundamentals of Indian economy; surprised why such data impacts India.”
US data show that joblessness in America was reducing, fuelling fears that the US Federal Reserve would start withdrawing its stimulus.
Chidambaram said the government had taken a “number of measures… let us wait for what the first quarter growth numbers are”. The GDP numbers are to be released later this month.
To restrict the outflow of foreign currency, the RBI had on August 14 announced stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.
The central bank reduced the limit for overseas direct investment (ODI) by domestic companies, other than oil PSUs, under the automatic route from 400 per cent of net worth to 100 per cent. Higher levels of ODI would now need prior approval from the RBI.
The measures taken by the RBI had more to do with reducing stress on the balance sheets of corporates, a finance ministry official said.
“With rising NPAs, corporates are getting more and more into difficulties... So looking into their balance sheet before they are allowed to invest abroad is all that has been proposed. Hence, it is not capital control,” Mayaram said.
“Gold, silver, platinum is what we believe as non-essentials. We have put curbs on that. I don’t think we need any more curbs,” Mayaram said.
The government earlier this week raised import duty to 10 per cent on gold, silver and platinum.
The finance ministry today said excessive rupee volatility was impacting equities.
“Our sense is that what is seen in India is happening due to what is happening all over the world. The rupee worry also spills over to the equity markets and the equity worry spills over to the rupee. It is potentially vicious,” a ministry official said.
“The rupee will finally find a level based on the state of the economy,” he said, adding that the government and the RBI plan to stick to small measures that won’t choke growth.
Moody’s today downgraded the bank financial strength ratings (BFSR) and baseline credit assessments (BSA) of three PSU banks — Punjab National Bank, Canara Bank and Bank of Baroda.
BFSRs represent Moody’s opinion of a bank’s intrinsic safety and soundness and exclude certain external credit risks. Its BSAs reflect the financial strength of issuers subject to extraordinary government support. Moody’s also changed the outlook on the BFSR of the Union Bank of India to negative from stable though ratings were left unchanged.
Commenting on the downgrades and the revision in outlook for Union Bank, Moody's said this reflected the challenges of the current macroeconomic environment, which have been exacerbated by the depreciating rupee and high levels of inflation.
“Measures by the RBI to support the currency have not reversed the depreciation, implying that interest rates may remain elevated for a longer time,” it added. In such a backdrop, PSU banks will find it difficult to respond to slower economic growth, deteriorating asset quality and declining margins.
Meanwhile, PNB today raised the interest rates on NRI deposits of over 3 years by 1 per cent, days after the RBI deregulated the interest rates on such deposits.