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Measures announced by the Reserve Bank of India in June to attract dollar inflows have brought in nearly $32 billion so far, RBI Governor Sanjay Malhotra said in an interview with The Hindu BusinessLine.
The inflows are expected to provide a boost to India’s balance of payments, Malhotra said.
Most of the funds have come through the Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme, the RBI governor said.
In addition, around $7 billion has entered India through foreign portfolio investments in debt securities following tax changes aimed at attracting overseas investors, Malhotra said.
The inflows come as India seeks to strengthen its external finances amid pressure on the rupee and a challenging global economic environment.
Most inflows through FCNR deposits
According to Malhotra, the bulk of the nearly $32 billion raised through the measures has come through FCNR deposits.
The scheme allows non-resident Indians and other eligible investors to hold foreign currency deposits with Indian banks. Such deposits can help bring foreign currency into the banking system without immediately exposing depositors to fluctuations in the rupee.
Malhotra said the RBI had not seen evidence that a bulk of the FCNR inflows represented the rebooking of existing deposits.
The comment is significant because a large-scale rebooking of existing deposits would suggest that the inflows did not represent substantial fresh foreign currency entering the country.
$7 billion enters through debt FPIs
Around $7 billion has come into India through foreign portfolio investments in debt securities following tax changes, Malhotra said.
The changes were part of measures aimed at making Indian debt markets more attractive to overseas investors.
Foreign portfolio inflows into debt securities can help provide additional foreign currency to the country while deepening participation in India’s bond market.
The nearly $32 billion in inflows could strengthen India’s balance of payments position and support the country’s external finances.
Government cash balances affect rupee liquidity
Malhotra said the dollar inflows had not fully translated into rupee liquidity in the financial system.
An increase in government cash balances was partly responsible for this, he said.
The comments highlight the role of government cash management in determining liquidity conditions in the banking system. Even when foreign currency enters the country, its impact on domestic rupee liquidity can be influenced by the government’s cash balances and the RBI’s operations.
RBI has not changed rupee policy
Malhotra said there had been no change in the RBI’s policy towards the rupee.
The central bank intervenes in the foreign exchange market only to curb excessive volatility, he said.
The RBI has repeatedly maintained that it does not target a particular level for the rupee. Its intervention is aimed at ensuring orderly market conditions and preventing sharp and disorderly movements in the currency.
Malhotra also said it would be reasonable to conclude that the rupee was not undervalued at its current level.
The currency has faced pressure from global economic uncertainty, capital flows and concerns over energy prices. However, the RBI governor’s comments indicate that the central bank does not consider the rupee to be fundamentally misaligned at its current level.
Repo rate appropriate amid growth-inflation dynamics
On monetary policy, Malhotra said the current policy repo rate was appropriate for prevailing growth and inflation conditions.
The RBI has kept the repo rate at 5.25 per cent as it balances the need to support economic growth with the risk of inflationary pressures.
Malhotra said generalised inflation pressures remained modest so far. However, he warned that the risk of higher food and fuel prices translating into a broad-based inflation environment was real.
Higher fuel prices can raise transportation and production costs across the economy, while food price pressures can affect household inflation expectations and wage demands.
The comments suggest that the RBI remains comfortable with its current monetary policy stance but is alert to the risk that food and fuel price shocks could become more widespread.
The nearly $32 billion in dollar inflows, meanwhile, are expected to provide additional support to India’s external position and balance of payments as the central bank continues to monitor currency volatility, capital flows and inflation risks.
