The government’s measures to stem the rupee fall and deal with the capital account situation are unlikely to result in any significant shift in fund flows into the country in the immediate future. According to experts, these measures are better suited when the sentiment in the global market is positive towards emerging markets and in general when it is relatively easy for emerging market corporates to raise money abroad.

Besides curbing imports, the government announced a slew of measures to make foreign portfolio investment in India more appealing, including relaxing prescriptive exposure limits. The government will also review mandatory hedging requirements for infrastructure loans. Other steps are intended to make it easier and less expensive for Indian companies to borrow abroad, thus increasing the flow of dollars into the country.

Main purpose

The government believes that these five measures could to lead to additional capital flows to the tune of $5-10 billion and limit currency pressures to some degree. However, experts feel that this will not trigger any major inflows into the country.

“We believe that giving additional exposure limits to FIIs might not be much helpful when they are already pulling out money from the Indian markets. Looking at a broader level, some of the emerging markets are considered vulnerable today because of the rising current account deficit problems and on account of worsening short-term external debt situations,” said Abheek Barua, chief economist, HDFC Bank in a note.

Apart from these capital account focused measures, there was also a promise to curb non-essential imports to compress the trade deficit. However, the specific items would be determined only after consultation with different ministries and ensuring that the measures would be WTO compliant.

“In our view, the announcements may fall short of bringing in the $8bn-10bn estimated by the government because most capital inflows, especially by FPIs, are driven by global push factors rather than domestic pull factors. Measures on curbing imports could work, albeit with a lag. As such, continued global trade tensions may end up offsetting the domestic announcements in the near term,” Nomura research said.

So far this year, the rupee has weakened significantly while foreign investors have sold $879.20 million and $6.31 billion in equity and debt markets, respectively. While this could be a small near-term fix, protectionist gestures are viewed with some caution by global investors as it gives the impression of a reversal of ‘reforms’. This is seen as potential negative for the currency beyond the very near term, analysts said.

India’s overall macro position is far better currently compared to 2012-13, with the exception of the banking sector, where NPAs have increased appreciably in the last five years. Consider the macro backdrop in FY13 that eventually led to the sharp currency depreciation in the summer of 2013.

The big question is does rupee depreciation pose significant risks for the $222.2bn external debt that is due by March 2019? “Assuming rupee remains below the 75 level mark, we don’t see risk of any systemic issue related to servicing of the external debt, particularly by Indian corporates (ECB’s due by March’19 are to the tune of USD25.9bn),” Deutsche Bank said in a note.

The negative sentiments around the rupee are likely to mitigate in the near term given the intent of the government to bridge the CAD funding gap. The government has highlighted that it will stick to its FY2019 fiscal deficit target of 3.3 per cent through buoyant direct tax revenues and overshooting of its divestment target even as it maintains its capital expenditure targets.