Indian Rupee Hits New Low as Modi Rarely Urges Saving Foreign Exchange and Suspending Gold Purchases

The oil price shock is testing India's foreign exchange reserves.

Indian Prime Minister Narendra Modi made a rare public statement last Sunday, calling on citizens to conserve fuel and fertilizer, expand the proportion of work from home, reduce outbound travel, and limit gold purchases to cope with the impact of the oil price surge triggered by the war in Iran on India's economy.

On Monday, Indian jewelry retailers' share prices plummeted. Major jewelers such as Titan, Senco Gold, and Kalyan Jewellers saw their stock prices drop by 6% to 8%.

Modi's call to stop buying gold is just one part of his suite of measures to save foreign exchange, which also includes conserving fuel, increasing the proportion of work from home, restricting outbound travel, and reducing non-essential imports.

Nomura Securities pointed out in its Monday report that this statement "signals a potential policy shift."

Investors are concerned that the government may suppress demand by significantly raising the import duty on gold. Surendra Mehta, Secretary-General of the All India Gem & Jewellery Domestic Council, stated: "Markets worry that the government might raise gold import duties significantly for a year to curb imports, with tax rates potentially exceeding the peak levels seen in recent years."

Historical precedents also cause market concerns. In 2012 and 2013, to stabilize the rapidly depreciating rupee, India twice raised import duties on gold. In 2024, to combat smuggling, it significantly reduced the duty from 15% to 6%, and what jewelers currently fear the most is the withdrawal of this tax reduction.

However, a government official said on Monday that India currently has no plans to raise import duties on gold and silver, attempting to allay market concerns.

The Indian rupee fell to an all-time low last week. As one of the severely affected countries in the world's most severe energy supply disruptions in history, India relies on imports for 90% of its oil needs and about 50% of its natural gas needs, and the surge in oil prices hits its foreign exchange reserves and exchange rates particularly hard.

The Reserve Bank of India has been selling off its US dollar reserves to stabilize the rupee and tightening controls on arbitrage transactions, while it is also looking into measures to further increase US dollar inflows.

Reuters has sorted out five policy tools that India has used historically and may now consider reactivating:

I. Overseas Indians' Deposits and Bonds

The Reserve Bank of India issued special deposit products for overseas Indians from 1998 to 2000 and in 2013 to attract US dollar inflows. The 2013 measure was notably effective—it attracted $26 billion in funds by providing banks with preferential exchange rate swap windows, effectively curbing the depreciation trend of the rupee, although the policy itself entailed certain subsidy costs.

II. Capital Account Relaxation

In times of pressure, the Reserve Bank of India has attracted US dollar inflows by easing standards for domestic enterprises to borrow abroad and lowering the barriers for foreign portfolio investors. Analysts at Standard Chartered Bank pointed out that India may consider lowering foreign ownership cap requirements, shortening minimum holding periods, and adjusting taxes on overseas investment capital gains to enhance attraction to foreign capital.

III. Restricting Non-Essential Imports

Historically, India has raised import duties on precious metals and non-essential goods such as gold during periods of foreign exchange pressure, along with rigorous declaration requirements and quantity controls. The most recent occurrence was in 2022, when India increased the gold import duty by 5 percentage points.

IV. Special Window for Petro-dollars

To insulate the impact on the foreign exchange market from oil imports, the Reserve Bank of India has historically provided a special US dollar swap window for oil refining enterprises, separating their US dollar demands from the open market. According to last month's report by Reuters, although the Reserve Bank has not officially opened such a window, it has guided oil refining enterprises to meet their foreign exchange needs through special credit instruments.

V. Tightening Remittance Limits

Under the framework of the liberal remittance scheme, individuals in India can remit up to $250,000 each year for purposes such as travel, education, and investment. Limiting this quota is a direct way to reduce foreign exchange outflows. India tightened this limit in 2013 and also strengthened related regulatory scrutiny in 2018. Since 2022, tourism-related remittance data has shown a significant acceleration in expenditures, leaving room for policy tightening.

V