Rupee in Crisis: India Quietly Plans Foreign Exchange Defense, Gold Purchase Restrictions May Be the First Step
Impacted by the war in Iran, India is facing significant foreign exchange pressure, with the rupee depreciating 5.6% against the US dollar year-to-date and foreign exchange reserves dropping to USD 690.7 billion. Prime Minister Modi has called on the public to stop purchasing gold, limit outbound tourism, use public transportation, and work from home. The government is studying several emergency measures, including restricting non-essential imports, raising fuel prices, and tightening regulations on foreign exchange withdrawals, to protect foreign exchange reserves and alleviate pressures on the current account deficit.
India is facing foreign exchange pressure amid the impact of the Iran war, and the government is studying a series of emergency response measures.
According to Bloomberg, Prime Minister Modi has already sent a signal of conservation to the public, urging them to stop purchasing gold—one of India’s largest import categories that severely depletes foreign exchange reserves. He also suggested restricting outbound tourism to reduce unnecessary outflows of foreign currency. Sources say that if public discipline proves insufficient, the government may temporarily limit the withdrawal of foreign exchange for non-essential purposes in the future.
In order to protect the increasingly strained foreign exchange reserves, the Prime Minister’s Office and the Ministry of Finance are in consultations with the Reserve Bank of India on several emergency restrictions, including limits on non-essential imports such as gold and electronics, raising fuel prices, and tightening regulations on foreign exchange withdrawals. No final decisions have been made yet. Officials remain vigilant about the continued widening of the current account deficit.
While controlling imports, Modi has also called on the public to use public transportation and work from home as much as possible to reduce fuel consumption and ease the foreign exchange pressure caused by energy imports. Asian countries like Vietnam and Thailand have previously adopted similar measures under comparable pressures.
Since the beginning of this year, the Indian rupee has depreciated by 5.6% against the US dollar, making it one of the worst-performing major currencies in Asia, and once falling to a record low. As of May 1, India’s foreign exchange reserves dropped to $690.7 billion, the lowest in over a month, but still sufficient to cover 10 to 11 months of import demand.
Multi-pronged Approach: India Responds to Energy Shocks and Foreign Exchange Pressure
As the world’s third-largest oil importer, India has been severely impacted by the disruption of supplies through the Strait of Hormuz and the surge in energy prices, leading to significant foreign exchange outflows and persistent pressure on the rupee.
The Reserve Bank of India has already implemented several supportive measures, including capping banks’ daily foreign exchange exposure at $100 million to curb speculation, and had once required banks to halt the provision of Non-Deliverable Forward (NDF) contracts to non-residents, though this measure was subsequently withdrawn. Sources indicate that the Reserve Bank of India may also adjust importers’ currency hedging rules, requiring exporters to repatriate dollars immediately upon receipt.
Sources say that an increase in fuel prices is under discussion, which would mark the first price adjustment since the outbreak of the Iran war. Meanwhile, Modi recently achieved a major victory in state-level elections, with his party and its allies now controlling two-thirds of India’s states, including West Bengal, a traditional stronghold of the opposition. This accumulation of political capital may provide greater room for implementing austerity measures.
Editor/Stephen
