2 hours ago
By Siddhi Nayak and Anup Roy
India expects to garner at least $80 billion in foreign-currency inflows from its recent measures to attract dollars into the country, its central bank chief said in an interview published Thursday.
“You will appreciate that the flows have been stronger than we expected and even stronger than what most market participants expected,” RBI Governor Sanjay Malhotra said in an interview with the Financial Express newspaper.
This is the first time that the central bank has disclosed a number that it expects to garner through a slew of measures it announced to shield a depreciating rupee. Analysts and bankers had estimated around $80 billion of inflows.
The measures, introduced in June, allows local banks to offer attractive rates on foreign-currency deposits with the central bank subsidising hedging costs. Latest figures released by the RBI showed the amount mobilised through the so-called foreign currency non-resident, or FCNR(B), deposits at $52.3 billion as of Aug 13. That, along with inflows through overseas foreign currency debt and external commercial borrowings, takes the total to $56.85 billion.
The flows were supposed to improve sentiment towards the rupee but the currency has barely budged from the level it was on June 5, when the measures were announced. That contrasts with a sharp rally in the rupee back in 2013 when such an overseas dollar window was last rolled out.
Malhotra’s comments come after the RBI last week surprised markets by bringing forward the closure of the FCNR swap window by a month to Aug 31. Malhotra defended the decision, calling it a data-driven “calibration” rather than a reversal.
“There is a diminishing marginal utility of every dollar that is swapped,” while the cost rises because the liquidity has to be sterilised for longer, he said.
Costs
The announcement may have appeared sudden, but the time given is sufficient for banks to make necessary arrangements, Malhotra said.
The program may also become costly for the central bank if it were to swell further. While the RBI doesn’t currently recognize the mark-to-market costs it incurs for subsidising banks’ hedging costs, it is considering whether to do so, said a person familiar with the matter, asking not to be named discussing preliminary deliberations. Central bank calculations show such provisions would amount to as much as 300 billion rupees in the first year of the program and potentially reach a cumulative 1 trillion rupees in five years, the person said.
That would be a drag on RBI’s profitability and may even impact the dividend it pays to the government, the person added.
The RBI did not immediately respond to a request for comment on any proposal to bear mark-to-market costs.
Malhotra said that the exchange rate continued to be determined by the market and the net short forward dollar position was manageable.
“The exchange rate continues to be market determined,” Malhotra said. “Our policy on intervention remains the same, which is to curb excessive volatility and any undue speculative activity.”
Over the past two years, India’s central bank built one of the world’s largest bearish dollar bets to support a persistently weak rupee. It faces the challenge of unwinding that position without destabilising the currency market. But Malhotra cited earlier liquidity swaps and recent measures that would help manage the short forward dollar position.
