Why RBI curbs are a downer for India Inc and investors

R Jagannathan
Firstpost.com

In what can only be seen as a panic move, the Reserve Bank of India (RBI) on Wednesday reversed the long-term secular trend of easing capital controls by severely limiting the amount of money citizens can remit abroad, and businesses can invest in foreign ventures. Gold imports are being further squashed.

It is not clear what impact all these measures will have on foreign sentiment and capital inflows. The big questions are:

#1: Will foreign investors now stop investing because they may worry about whether more capital controls will be introduced to limit outflows? Will money come in if it is not free to move out?

#2: Will NRIs now worry about their ability to move in and out of Indian bank deposits at will?

#3: Will more of the Indian demand for gold, already subject to high import duties, now shift to unofficial and illegal channels? The evidence is that it already has. Now smugglers will be the main beneficiaries.

#4: Will Indian business now clam up further? If they don't want to invest in India, and can't invest abroad, will they now just sit on their hands and wait for the crisis to blow over? Or a new government to come in?

#5: Will some exporters now begin underinvoicing exports in order to keep more of their dollars abroad, out of the clutches of the Indian state?

Make no mistake, the message coming out of North Block and Mint Street is a clear downer for India Inc. In terms of the sense of crisis, we are back to pre-1991 days.

The writer is editor-in-chief, digital and publishing, Network18 Group