In a bid to shore up the rupee, the Indian government has banned residents from buying homes overseas.
The rupee has fallen to record lows against most major foreign currencies – but has sunk to just one penny against the pound and 1.5 cents against the US dollar.
One of the government’s fears is rupees are flowing out of India for investment in property in Britain and the US and this shift of cash to safe haven nations is draining the economy.
Another issue is the inflow of foreign cash. Millions of Indians have jobs in the Middle East and remit much of their income back to India.
However, leading expat employers like Saudi Arabia are taking steps to stamp out the undercover economy and stop money seeping from their own shores to India.
Forex confidence
A spokesman for property consultants Jones Lang LaSalle India explained that Indian families liked to buy property abroad.
“Letting out foreign property gives many families a steady income, homes for their families abroad or somewhere to stay when visiting their loved ones in other countries. This investment in foreign property is going to decline very quickly now these measures are in place.”
The problems are not over for the rupee.
Many foreign exchange analysts expect the currency to dive lower by the end of the year.
The problem is the Reserve Bank of India and the government are not taking action to bolster the currency, and are being seen as weak and riddled with uncertainty.
The government is looking at a forthcoming general election and seems in two minds – by taking action like banning foreign property purchases, they risk becoming unpopular at home, but if they are risking unpopularity they might as well take even more drastic action to keep the currency afloat.
Problems piling up
Other problems are piling up for the rupee.
As a non-convertible currency, payments for imports like oil have to be made in US dollars, and with the rupee declining against the dollar and fuel prices rising as well, prices are rising exponentially fast.
Overseas banks are suggesting the Reserve Bank of India should consider selling bonds to raise foreign exchange – but note that doing so raises questions about the depth of the nation’s foreign reserves.
So, for the moment it seems turning anyway to try to resolve the crisis looks like weakness by the bank or government, but so does not doing anything, so they really are in a ‘lose/lose’ situation.
