The move on capital controls by the RBI is by far the most damaging for the rupee. Foreign investors will now worry about some form of capital controls on their investments. The fact that the Indian g
overnment is falling head over heels to bring in foreign investors will not prevent worries on capital controls in the minds of the investors.The world is replete with countries that have failed to prevent currency depreciation through capital controls. Malaysia in the late 1990s and Argentina in the 2000s are examples of capital controls that never worked. Iceland imposed capital controls post its crisis in 2008 and has still not been able to roll back any of the measures.
It is true that the central bank has in no way curbed foreign investors from bringing in and taking out money freely from the country but even a hint of suspicion that this could happen is enough to take down the INR.RBI and the government will now have to send out clear messages to foreign investors that there will be no controls on their investments in India. However, the damage has been done and markets will trade weak until some calm emerges.
This is like holding the Reserve Bank of India responsible for all the mess. The onus for the current sorry state of affairs in the economy should be clearly on the government. Those who criticise the
moves should remember that the RBI only manages the monetary policy. The fiscal policy management is the government’s prerogative. The RBI can only point out the policy mis-steps, which it has done many a time in the past to which the government and its various departments remained deaf. With the unprecedented fall in the rupee raising the spectre of inflation, the RBI had no option but to tighten liquidity. The central bank was fully aware of the consequences of the interest rate defence of the rupee. If the economic growth suffers this year, the ultimate reason for that would be the government’s inaction over the last few years. Fingers should not be pointed at the RBI. In fact, it has to be appreciated for doing whatever it can in the current situation.