Govt weighs emergency steps to protect forex reserves

India is considering emergency steps to shore up foreign-exchange reserves, including curbing non-essential imports like gold and electronic goods, and hiking fuel prices, to help cushion the economy from the fallout of the Iran war, people familiar with the matter said.

Officials in the Prime Minister’s Office and Finance Ministry have held discussions with the Reserve Bank of India on several measures that could be taken to limit the damage from soaring oil prices, the people said asking not to be identified as the discussions are private.

One of the proposals under discussion is a fuel price hike, the people said, which would be the first increase since the Iran war began and come on the back of Prime Minister Narendra Modi’s landslide win in recent state elections. No final decision on the emergency measures have been made yet, the people said.

Gold and consumer electronics are considered non-essential imports and steps could be taken to restrict those items, one of the people said. Officials are concerned about the widening current account deficit and the measures are aimed at curbing imports to preserve foreign exchange, the people said.

India’s Finance Ministry and central bank didn’t respond to requests for further information.

India is the world’s third-largest oil importer of oil and the country has been hit hard by soaring energy prices and the halting of supplies through the Strait of Hormuz. The outflow of foreign exchange to pay for higher energy bills has pressured the rupee, which has plunged to a record low, and forced the RBI to take aggressive steps this year to stabilize the currency.

On Sunday, Modi urged citizens to use public transport and work from home to conserve petrol and diesel. He also called on the public to stop buying gold — one of India’s import categories — and restrict overseas travel.

The emergency measures are not unprecedented. Several countries in Asia, such as Vietnam and Thailand, have asked citizens to work from home to save on fuel and preserve dollars.

The prime minister’s comments were cautionary and preparing the ground for any possible future shortages, the people said. Preserving foreign exchange is important during uncertain times and if citizens don’t act responsibly, authorities could temporarily restrict withdrawals of foreign exchange for non-essential purposes, one of the people said.

Modi may be emboldened by his recent election win to push through austerity measures. His party or allies now control two-thirds of India’s states after a milestone win last week in West Bengal, previously an opposition stronghold.

The rupee is down 5.6% against the dollar this year, making it the worst performer among major Asian currencies. The RBI has been steadily intervening to bolster the currency, with foreign exchange reserves dropping to $690.7 billion as of May 1, the lowest level in over a month. The reserves are enough to cover 10 to 11 months of imports.

The central bank has also taken several other measures to support the rupee, including curbing speculation in the forex market by limiting banks’ daily open positions to $100 million. It also asked lenders to stop offering non-deliverable forwards to non-residents, though it was withdrawn later.

The RBI could change rules on currency hedging for importers and ask exporters to repatriate dollars immediately upon receipt, a person familiar with the matter said.