India FX deposits to help earn more revenue: RBI Governor Sanjay Malhotra | Finance News
By Anup Roy
India’s central bank rejected estimates that its record foreign-currency deposit drive will prove costly, saying the inflows will instead generate additional income for the Reserve Bank of India as it deploys the dollars overseas, Governor Sanjay Malhotra said Friday.
“Net, net, it will only result in additional revenues, additional income” for the central bank because the dollars can be invested in government securities abroad to earn interest, Malhotra told CNBC-TV18 in an interview. The RBI discussed the scheme with major banks and other stakeholders before launching it, he added.
The comments come as the RBI deals with the fallout from record foreign-exchange inflows. The resulting surge in rupee liquidity risks pushing down borrowing costs and complicating efforts to keep monetary conditions aligned with its policy stance.
Malhotra said the RBI will use all available measures to remove the excess liquidity from the system. “We are alert to that. We have enough tools, we have tools like Open Markets Operations, swaps as necessary to withdraw surplus,” he added. “Nothing is off the table,” the governor said.
The central bank is using tools such as variable reverse repo auctions and currency swaps to remove the excess cash to prevent the easy liquidity translating into lower lending rates by banks that could fan inflation.
India drew a record $127 billion from its vast diaspora, surpassing even the most optimistic estimates and giving policymakers a bigger war chest to defend the currency. Liquidity has surged in the banking system as lenders swapped their dollars with the central bank in exchange for rupees.
While the deposit plan ended a month before its schedule, companies are allowed to raise foreign currency loans through December that can be hedged at the expense of the RBI. Overall, the two plans brought in more than $136 billion as of August. Analysts estimate the foreign fund raising to cost the RBI as much as $10.6 billion over a five year period.
On growth, Malhotra said India’s first-quarter expansion has been robust, with private consumption, investment and exports all contributing to stronger-than-expected momentum. The RBI was not entirely surprised by the numbers, he said, with incoming corporate data pointing to firmer growth.
“The Indian economy has weathered this shock really well,” Malhotra said.
Data last month showed gross domestic product grew 7.8% in the April-June quarter, surprising analysts. The festive season, which begins in September and runs for more than two months through Diwali, is also expected to boost consumption and strengthen economic growth.
