So then what is achieved by introducing capital controls like the ones proposed on PNs, or by restrictions on ECBs which proved to be ineffective in removing the pressure on the rupee? Such moves signal that the government will be fighting the pressure on the rupee to appreciate. Considering that India is one of the fastest growing economies in the world, capital is going to keep coming into India and it is unlikely that the RBI will be able to keep the rupee at Rs 39.50 to a dollar forever. The maximum that it is likely achieve is to slow down the pace of appreciation.

Restricting ECBs or PNs give the same message that heavy intervention by the RBI gives, week after week. The message is that that either you will see the rupee slowly appreciate in the coming days, or you will see the RBI fight the appreciation until the time comes when it can no longer do so and will let go, allowing a sharp appreciation. The conclusion is straightforward: the rupee is a one-way bet. No wonder no one expects the rupee to depreciate. Every analyst continues to forecast a stronger rupee and advises clients to invest in India. Already the returns on rupee assets in India are high. If in addition, the rupee is sure to appreciate, dollar returns to the investments in India will be even higher. The steps to curb inflows will only encourage more capital inflows.

The writer is senior fellow, National Institute of Public Finance and Policy, New Delhi