When news came last week that India tightened capital controls and banned gold imports, I pinged Pater Tenebrarum at Acting Man with a pair of comments.
- Looks like India is about ready to blow up
- Looks good for gold
He agreed on both counts.
“No Question” of Economic Crisis
On Saturday came an “official denial” in an amusing way. Please consider “No Question” of India Economic Crisis.
There is “no question” of India going back to an economic crisis experienced in 1991, as its rupee currency is now linked to the market and foreign exchange reserves are adequate, Prime Minister Manmohan Singh said on Saturday.
“There is no question of going back to 1991,” Singh said in a Press Trust of India report published by the Economic Times newspaper on its website, making reference to a balance of payments crisis the country suffered that year.
“At that time foreign exchange in India was a fixed rate. Now it is linked to market. We only correct the volatility of the rupee.”
The news agency report said Singh acknowledged India’s ballooning current account deficit, which he blamed on large imports of gold as a contributing factor.
“We seem to be investing a lot in unproductive assets,” Singh said.
India is trying to curb its citizens’ apparently insatiable demand for gold, through measures such as hiking import duties, banning the import of coins and medallions and making domestic buyers pay cash.
The government wants to hold bullion imports this year to “well below” last year’s figure of 845 metric tons.
I agree there is “No Question” of Economic Crisis. When a country implements capital controls and bans gold imports, the country is clearly in a state of economic crisis, no question about it.
There is one difference between 1991 and now, because the rupee is no longer pegged. This means that instead of attempting to defend a rate with interest rates hikes or gold outflows, India “only” has to “correct the volatility of the rupee”.
Only? That’s all? So why doesn’t India do it?
Don’t Worry – Capital Controls are Not Capital Controls
Last Wednesday the Reserve Bank of India denied capital controls were capital controls with promises stable policy environment.
The finance ministry has said it will take all measures to provide a stable policy environment to stem the volatility in rupee and clarified that measures announced by the Reserve Bank of India (RBI) on Wednesday should not be seen as capital controls.
“There is no question of us putting any restriction on outflows… There is no control of outflows of dividends, profits, royalties, or on any kind of commercial outflows which happen in the normal course…,” Department of Economic Affairs Secretary Arvind Mayaram told reporters on Friday.
Official Denials Run Rampant in India
The denial is rather amusing given “The RBI announced lowering of the limit on outward remittances by resident Indians to 75,000 dollars from 200,000 dollars a year and reduced the overseas investment limit for domestic companies under the automatic route to 100% of net worth from 400% of net worth earlier.”
Here is another humorous statement “”Gold, silver, platinum are what we believe as non-essentials. We have put curbs on that. I don’t think we need any more curbs,” he said. Another finance ministry official said the measures taken by the RBI cannot be termed as capital controls as they were aimed at ensuring prudent borrowings by corporates.“
Don’t Worry, It’s Not Capital Controls …
- If the measures are aimed at “prudent borrowing” (as determined by the state of course)
- If the restrictions limit outward remittances on individuals to $75,000 from $200,000
- If the restrictions the overseas investment limit for corporations
- If it pertains to gold, silver, and platinum
Anything else that’s not capital controls? Not yet, but I expect more “non-capital controls” to be implemented next week.
On Wednesday, the Wall Street Journal reported India Inflation Accelerates in July.
India’s inflation moved out of the central bank’s comfort zone in July, as food prices rose and a weak local currency increased the cost of imports.
The wholesale price index, India’s main inflation gauge, rose 5.79% from a year earlier, compared with 4.86% in June and at its fastest pace since February, data from the Ministry of Commerce and Industry showed Wednesday. That exceeded the median estimate of 5.00% in a poll of 13 economists. According to the Reserve Bank of India, inflation above 5.00% hurts the economy’s growth prospects.
The latest data will increase the pressure on the central bank which is caught between rising prices and a slowing economy, and pose policy challenges to Raghuram Rajan, who takes over as central bank governor in early September. Though the wholesale inflation has eased from around 10% a couple of years ago, inflation at the retail level is still near double digits.
Food prices increased 11.91% from a year earlier in the past month, compared with 9.74% in June. Vegetable prices rose a staggering 46.59% in July, after a 16.47% increase in June.
Onion Prices Up 144%
Onions, a primary staple in the India diet are up a mere 144% according to Live Mint.
The latest wholesale price index (WPI) numbers released on Wednesday show that onion prices rose 144% in July over the year-ago period, after a similar increase in the previous month. Since January, onion price levels have been nearly double what they were a year ago.
The persistent increase seems to be finally ringing alarm bells, with state governments across the country fighting to bring down prices. Higher onion prices have not only added to high food price inflation, but also rattled governments over the years, for example contributing to the defeat of the Bharatiya Janata Party (BJP) in state elections in Delhi in 1998. Hence the alarm!
Enormous Property Bubble
I have commented several times on India’s property bubble. For example, please consider
May 10, 2013: Huge Bubble in India Home Prices Ready to Burst
August 1, 2013: India Housing Bubble Still Expanding
Explaining the bubble is easy enough. Inflation is rampant and investors are willing to chase assets rather than hold on to declining Rupees.
Rupee Hits Record Low of 62/Dollar
Reuters reports Rupee hits record low of 62/dollar, foreign investors baulk.
Finance minister Chidambaram tried to talk up the rupee on Friday after it plumbed another record low on concerns the Reserve Bank of India’s (RBI) latest measures to defend the currency could be a step towards outright capital controls.
Traders said the RBI was forced to step in to prop up the rupee as measures from the central bank late on Wednesday restricting how much Indian citizens and companies can invest abroad were seen as yet another roll of the dice that is undermining investor confidence.
Concerns that policymakers were losing control over the currency spread to the stock market, which dropped 4 percent, its biggest one-day decline in nearly two years.
Indian policymakers have cobbled together a slew of steps over the past month in a bid to halt the rupee’s slide, including the central bank’s extraordinary steps on July 15 to drain cash from the system and raise short-term interest rates in an economy already growing at a decade low.
Yet none of the steps or the rhetoric so far have convinced investors that India can attract overseas investments, which is seen as essential in narrowing a record high current account deficit that is the biggest source of the rupee weakness.
Rupee Plunges 40% in Two Years
The above chart explains the nature of the crisis: Rampant credit and monetary growth that has fueled inflation, capital flight, and a desire to hold gold.
Currency Stress Hits India
On June 24, I wrote Currency Stress Hits India: Rupee Near Record Low, Emerging Nations Face Capital Flight; Global Currency Crisis Awaits. Here is the pertinent snip.
Defending the Rupee
Just like Brazil defending the real, India now feels compelled to defend the rupee. Good luck with that idea if capital flight takes off in a major way (and I suspect it will).
India does have currency reserves, but those can vanish in a hurry if things get out of hand. And if India does use currency reserves to defend the rupee, I rather doubt the India bond markets will take all that kindly to it.
Thus defending the rupee against further declines is easier said than done if the markets have indeed soured on the country, and that is precisely how it looks now.
Global Currency Crisis Awaits
A global currency crisis awaits. I do not know what country triggers first. It could easily be Japan, China, Brazil, India, Australia, Canada, the UK, or any of many countries in the eurozone (as well as numerous countries not on anyone’s radar).
This sad state of affairs is courtesy of mad central bank monetary policies coupled with inane can-kicking fiscal policies everywhere you look.
Just Your Imagination
But hey, don’t worry. There is “No Question” of economic crisis, not in India, nor anywhere else. It’s all a figment of your imagination. So move along, and whatever you do, don’t buy gold.
To help prevent its citizens from doing such a foolish thing, India banned gold coin imports.
What country is next to ban gold imports?
Mike “Mish” Shedlock