RBI Cuts Non-Approved Corporation Overseas Invesmtent Limit

India increased efforts to stem the rupee’s plunge and stop capital outflows that are pushing the economy towards its biggest crisis in more than two decades.

The Reserve Bank of India, whose Governor Duvvuri Subbarao steps down next month, cut the amount local companies can invest overseas without seeking approval to 100 percent of their net worth, from 400 percent, according to a statement late yesterday. Residents can remit $75,000 a year versus the previous $200,000 limit. Rupee forwards rose for the first time in three days.

Policy makers’ moves since July to tighten cash supply, restrict currency derivatives and curb gold imports have failed to arrest the rupee’s slump to record lows as they struggle to attract capital to fund a record current account deficit. The rupee has weakened 28 percent in the past two years, the biggest tumble since the government pledged gold reserves in exchange for loans from the International Monetary Fund in 1991.

“I don’t think this fixes India’s problem, at best it restricts about $5 billion of flows annually, which doesn’t make a dent,” Bhanu Baweja, the global head of emerging market cross asset strategy at UBS AG, said in a phone interview from London yesterday. “The minute you restrict outflows, people will start legitimately speaking in terms of capital controls, although these are only on locals and not on foreign investors.”

Bloomberg

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