India has tightened restrictions on the amount of money companies and individuals can send out of the country, trying to curb a sharp decline in the rupee.
Since May, the Indian currency has declined about 16 per cent against the U.S. dollar, and the slide continued Wednesday, with the rupee at a record low of 64.54 rupees to the dollar. The rupee is testing new lows against the dollar on an almost daily basis.
On Wednesday, the Reserve Bank of India said that it will inject 80 billion rupees ($1.26 billion US) into the country's banking system by buying long-term government bonds.
The move is geared to make credit more readily available after the cost of borrowing on India's 10-year bonds rose to 9.48 per cent on Tuesday, the highest level since 2001...
...But of greater concern is the government’s record high current account deficit at 4.8 per cent of GDP. India is especially vulnerable to funds moving away from emerging markets in anticipation of a winding back of the U.S. Federal Reserve's stimulus program.
Bhaskar Chakravorti, senior associate dean at the Fletcher School for international affairs in Medford, Mass., said India’s high level of debt is in part due to energy subsidies put in place to keep consumers happy.
“In the energy sector over the past few years and this is part of the problem that the economy is facing, this was a heavily subsidized sector for the Indian consumer. And now a lot of those government subsidies are coming home to roost,” he told CBC’s Lang O’Leary Exchange.
“There is an election coming up next year and there is a lot of populist rhetoric in the air. Essentially until the elections are over, no one has a clear sense as to whether the tax regime and regulation regime will be lifted.”
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