MUMBAI (BLOOMBERG) - India tightened exports of oil and imports of gold in an all-out effort to support the rupee, which plunged to a new low on Friday (July 1).

The currency fell 0.2 per cent to 79.1113 per US dollar after hitting multiple lows in recent weeks.

The Modi administration on Friday raised import taxes on gold, while increasing levies on exports of petrol and diesel as it sought to control a fast-widening currency deficit. The measures sent shares of Reliance Industries and other energy exporters tumbling, bringing down the benchmark stock index by as much as 1.7 per cent.

The plunging rupee underscores the economic challenges faced by Prime Minister Narendra Modi’s government as inflation accelerates and external finances worsen. The central bank has been battling to slow the currency’s decline, and runaway rupee depreciation will worsen price pressures and may spur more rate hikes that weigh on growth.

While the Reserve Bank of India (RBI) has been seeking to smooth out the currency’s decline, banks have reported US dollar shortages as everybody from investors to companies rushed to swap the rupee. The currency has fallen 6 per cent this year against the dollar, as rate hikes by the United States Federal Reserve pulled capital from developing markets.

Policymakers in many emerging markets all face stark choices: forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply step away and let the market run its course.

Commodity pressures

The government on Friday raised the import duty on gold to 12.5 per cent from 7.5 per cent, according to a notice dated June 30, reversing a cut last year.

“At the moment, the challenges are emanating from the same source, which is higher commodity prices,” said Barclays Bank senior Barclays Bank senior economist Rahul Bajoira.

India can neither find supply onshore nor will it be able to cut back the consumption of oil, he said.

"That makes the whole situation a lot more unpredictable both in terms of how this plays out and how long this continues for,” he added.

For the broader fuel market, India’s move to tax petroleum exports may further tighten fuel supplies at a time when emerging markets are facing shortages and lines are forming at pump stations in those countries.

RBI governor Shaktikanta Das has said the central bank uses a multipronged intervention approach to minimise actual outflows of dollars and will not allow a runaway rupee depreciation. The RBI has close to US$600 billion (S$836 billion) of foreign exchange reserves that it has been deploying to curb any sharp volatility in the currency.