India's latest steps to prop up the rupee will deter many Indians from buying homes abroad and hinder overseas expansion plans for many companies.
The Reserve Bank of India on Wednesday unveiled a slew of dramatic measures to reduce flows of foreign exchange out of the country. These included cutting the overseas direct investment limit for Indian companies from 400 per cent to 100 per cent of their net worth.
The central bank also reduced the amount of money that Indian residents can send abroad to US$75,000 a year compared with the previous limit of $200,000. It also banned Indian residents from investing that money in property abroad "directly or indirectly".
The rupee has plummeted to record lows against the US dollar and has gained little support so far from liquidity tightening steps taken by RBI last month and the finance ministry's announcement of several measures targeted at reducing the current account deficit on Monday.
"Individuals who were planning to buy international real estate at attractive valuations and planning for their kids' education and housing abroad will now see such plans challenged," said Om Ahuja, the chief executive of residential services at Jones Lang LaSalle India. "Currently, the variety of options available on the international property market offer very attractive rental yield and valuations, making the proposition of investing in property abroad a potentially lucrative one. However, the new restrictions will put a dampener on the sentiments of Indian investors who were considering this route."
Indian nationals invested the most money into the Dubai property market during the first half of this year, spending more than Dh8 billion in 499 transactions, according to Dubai Land Department figures released this month. However, it did not say how many of these were resident in India and how many resided elsewhere in the world.
"While there could be some impact on the Dubai property market for Indians looking to invest abroad in the emirate I suspect it will be fairly limited," said Craig Plumb, the head of research in the Jones Lang LaSalle's Dubai office. "We believe that the majority of the Indian purchasers in Dubai are resident elsewhere - either in the UAE or the UK," he said.
Moreover, with the sort of wealthy purchasers we are talking about, if they are hit by the rules, they are likely to be able to find a way around them."
The central bank described the measures as "aimed at moderating outflows". It also banned the import of gold coins. In an effort to boost foreign currency flows into the country, the RBI eased the control of interest rates on some fixed deposit schemes for NRIs (non-resident Indians), which will mean better interest rates for expatriates on some accounts.
The RBI excluded state oil companies from the cap on overseas direct investment. Other companies can apply to the central bank to seek special approval if they want to invest more than 100 per cent of their net worth.
"On the one hand, the domestic environment is not conducive for investing in and, on the other, foreign investments will become more difficult," A Subbarao, the group chief financial officer of RPG Enterprises, told the Indian business newspaper Mint. "This will have some setback for Indian companies looking to invest abroad." He pointed out that the approvals might not be given at all in some cases.
Similarly, individuals that want to remit more than $75,000 out of India can apply for permission too in special cases, although it is not clear how easily and under what circumstances they would be able to gain the approval.
The rupee yesterday traded near its record lows.
"Finance minister P Chidambaram has maintained these are temporary measures and not capital controls, but judging by the reaction of the Indian rupee, the markets seem to be getting a mixed message," said Gaurav Kashyap, the head of futures at Alpari ME, a global online currency and commodity broker.
Steps announced by the finance ministry this week to narrow India's current account deficit included restricting imports of non-essential items. On Tuesday, India raised the import duty on gold, which is a major cause of the large deficit, to 10 per cent from 8 per cent.