The Reserve Bank of India’s measures to ‘moderate’ foreign exchange outflows have become a near-perfect example of the law of unintended consequences. If the intent was to stabilize the rupee’s exchange rate, it had the opposite effect: the rupee depreciated even further, to over Rs 62 to the dollar. If the intent was to stabilize volatility and expectations, that failed too. These latest measures — reducing the amount of capital that a company can invest directly overseas from four times its net worth to once, remittances overseas by individuals from $200,000 a year to $75,000 a year, and barring them from buying property overseas — are limited capital controls, but they scared investors nevertheless. On August 16, the stock market fell by over 700 points, and by another 290 points plus on August 19.
Some analysts have suggested that the stock market may be overreacting. The consensus that restricting capital mobility through controls is a bad idea no longer holds; even that great advocate of free and unrestricted capital mobility — the International Monetary Fund — in 2010 suggested that some capital controls may actually be appropriate. The IMF was referring to controls on inflows rather than outflows, which companies from Thailand through Cyprus to Argentina and Brazil are now considering. The question in India is whether they are necessary at this juncture.
Corporate overseas investment in 2012-13 was $7.1 billion, and outward remittances were just over $1.2 billion. The cumulative figures for three prior financial years were $41.7 billion and $3 billion respectively. A conservative estimate of corporate India’s net worth is $400-500 billion; it is hardly likely to borrow four times that. Similarly, outward remittances have been around $1 billion for the last four years, and are unlikely to make a dent. The RBI and the government seemed to have looked at the different components of India’s balance of payments, and announced measures aimed at targeting specific ones. First it was import curbs: levying additional duties on gold and precious metal imports to rein in the current account deficit. That did not work, given insatiable demand and the attendant speculative buying. Then it was liquidity management, targeted at curbing foreign currency speculation, and now it is capital controls. The central bank may have identified what it needed to know, acquired the relevant information and articulated actions ignoring factors it had no control over, like the weak global economy that has led to a strong dollar. Robert Merton, the sociologist who described the law of unintended consequences, called this the ‘relevance paradox’; subsequent events, however, have made the RBI’s actions seem irrelevant.