Why India is taking measures to protect the Indian rupee

Part 2

Why India’s new protective measures could scare away investors

The Indian government reveals additional measures to patch up balance of payments

The measures indeed address the current account deficit, increase deposit, and attract external debt financing. However, preventing residents from exporting capital seems like going a little too far—yet still with very limited effect.

A main headwind for the measures is that global credit conditions have taken a hit as the U.S. Federal reserve prepares to start tapering quantitative easing.

India vs Emerging Market 2013-08-19Enlarge Graph

Backfire from new measures?

An important secondary effect is that capital controls could scare away investors. For now, it seems that only residents will be affected, but global investors could perceive the measures as a first step before limiting foreign investors. This in turn would lead to the complete opposite of the intended effect and reduce both financing and investment.

Outlook on India

While there are several sectors in the Indian economy that may attract to investors, you shouldn’t ignore the foreign exchange risk. There are some efforts toward much-needed structural reforms that will have a long-term effect in the country, but elections next year may prevent any meaningful accomplishments that would help the economy actually start moving in the right direction.

The Realist Discussions