The Reserve Bank of India’s (RBI) recent measures to attract foreign capital have garnered strong investor response, with banks mobilising nearly $32 billion, largely through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits, while government securities have attracted more than $7 billion in foreign inflows since the June policy measures, RBI Governor Sanjay Malhotra has said.
In an interview with The Hindu BusinessLine, Mr. Malhotra dismissed concerns that the inflows merely represent a recycling of existing deposits. He added that the RBI has adequate tools to manage any resulting liquidity. The inflows have strengthened India’s external position amid heightened geopolitical uncertainty and volatile global capital flows, he said.
Responding to concerns over the RBI bearing the hedging cost of fresh FCNR(B) deposits and offering concessional forex swaps for external commercial borrowings (ECBs) by public sector entities, Mr. Malhotra said: “It is not something which should be a matter of concern because we have a foolproof system of insuring ourselves. So, whatever dollars we get, the excess foreign currency is invested in foreign assets. The risk, therefore, is not there.”
The Governor said the measures should be viewed in the context of challenging global conditions facing emerging markets and are expected to further strengthen India’s balance of payments and currency stability.
Mr. Malhotra also sought to reassure markets on the rupee, arguing that recent depreciation does not reflect any weakness in the country’s economic fundamentals. According to him, pressure on the currency has largely stemmed from geopolitical tensions, dollar strength and broader volatility across emerging markets.
“We do not target any specific exchange rate or band for the rupee. Our intervention, whenever necessary, is targeted to curb excessive volatility,” he said, adding that the currency is “not overvalued” and could even be considered undervalued in both nominal and real effective exchange rate terms.
He cited the current account surplus during April-May, robust services exports, resilient remittance inflows, rising merchandise exports and improving foreign direct investment flows as indicators of the strength of the external sector.
Forex management
On forex reserve management, Mr. Malhotra said the RBI continues to be guided by the principles of safety, liquidity and returns, while reviewing reserve deployment periodically.
Turning to monetary policy, the Governor reiterated that inflation control remains the RBI’s foremost priority even as it remains mindful of growth risks. He said the Monetary Policy Committee (MPC) will continue to adopt a data-dependent approach while navigating the evolving growth-inflation trade-off.
“Our primary mandate is inflation and price stability. Therefore, we will do whatever is required first, to keep price stability and then, to see to what extent we can support growth,” he said.
While inflation has moved above the 4% midpoint of the MPC’s target band, Mr. Malhotra indicated that policymakers do not yet see signs of broad-based price pressures becoming entrenched.
On policy rate
Mr. Malhotra defended the current policy rate, saying it reflects prevailing growth-inflation dynamics and elevated global uncertainties. The MPC’s neutral stance, he noted, provides flexibility to maintain the status quo or move rates in either direction depending on incoming data, with decisions guided by domestic conditions rather than policy actions of global central banks.
The Governor downplayed concerns that strong credit growth could lead to overheating, arguing that credit creation generates deposits while capital adequacy, liquidity coverage and stable funding ratios remain the key constraints on lending. He added that Indian banks remain well positioned on these parameters.
Addressing governance issues, Mr. Malhotra said the RBI’s regulatory and supervisory framework remains robust, while growing foreign interest in Indian banks and NBFCs reflects confidence in the country’s financial system and long-term growth prospects. Ownership norms, he added, will continue to emphasise fit-and-proper criteria and diversified shareholding structures.
(The writers are from the Hindu BusinessLine)
