RBI Governor says FCNR(B) Inflow $32 Billion Since June Measures; Gilt Inflows Top $7 Billion: Report

Banks have mobilised nearly $32 billion, largely through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits, since the Reserve Bank of India announced a package of foreign capital mobilisation measures in early June, Governor Sanjay Malhotra said, indicating the central bank's efforts to shore up external financing have drawn a strong response despite a challenging global environment.

In addition to the FCNR(B) mobilisation, overseas investors have brought more than $7 billion into Indian government securities since June 5, when the RBI announced measures to encourage foreign investment in gilts, taking total inflows generated by the package to around $39 billion, Malhotra said in an interview with The Hindu BusinessLine.

"At this pace, the total inflows are likely to be robust," the governor said, adding that the RBI had not found any prima facie evidence suggesting banks were merely recycling existing FCNR(B) deposits to take advantage of the temporary incentives.

The comments indicate that the RBI's temporary FCNR(B) swap facility, concessional forex swap window for eligible overseas borrowings and measures to facilitate foreign investment in government securities have attracted substantial overseas capital at a time when emerging markets continue to face pressure from geopolitical uncertainty and elevated US interest rates.
Malhotra dismissed concerns that the RBI was taking on significant exchange-rate risk by offering concessional swap facilities for FCNR(B) deposits and certain external commercial borrowings.

"It is not something that should be a matter of concern because we have a foolproof system of hedging ourselves," he said, explaining that the central bank invests excess foreign currency mobilised under the scheme in overseas assets, effectively neutralising the currency risk.

The governor also argued that recent weakness in the rupee did not reflect deterioration in India's macroeconomic fundamentals.

"I would like to reiterate that it would be reasonable to think that the rupee is not overvalued. If anything, one could argue that the rupee has become undervalued both in nominal and in REER terms," he said.

Malhotra reiterated that the RBI does not target any specific exchange rate or trading band and intervenes in the foreign exchange market only to curb excessive volatility.

He cited a current account surplus during April-May, resilient services exports, robust remittance inflows, improving foreign direct investment and rising merchandise exports as signs that India's external sector remains strong.

Malhotra said the foreign capital inflows had already begun adding to durable banking system liquidity, although the impact was not yet fully visible in overall system liquidity conditions.

He said durable liquidity had increased by about 1.2 trillion rupees since June 5. However, the inflows were yet to be fully reflected because banks typically swap the foreign currency mobilised under the FCNR(B) scheme with the RBI, causing a lag before the funds enter the banking system.

He also said government cash balances had risen by around 2.9 trillion rupees over the same period, absorbing a significant portion of liquidity. In addition, some liquidity had been withdrawn due to the RBI's foreign exchange market interventions to smooth excessive volatility.

"These are the main reasons," Malhotra said, explaining why banking system liquidity continues to remain under pressure despite strong foreign capital inflows.

On the policy front, Malhotra said inflation control would continue to take precedence even as the Monetary Policy Committee remains mindful of growth risks.

"Our primary mandate is price stability," he said. "We will do whatever is required first to keep price stability and then, to see to what extent we can support growth."

While headline inflation has risen above the RBI's 4% target, the governor said broader inflationary pressures remain modest for now. However, he cautioned that higher food, fuel and input costs could become more generalised if they begin feeding into inflation expectations.

He said the MPC would remain data-dependent at its upcoming policy review and would assess incoming information before deciding on the appropriate policy response.

Responding to whether the central bank could look through the recent rise in inflation, Malhotra said monetary policy reacts to supply shocks only when they become broad-based or threaten to de-anchor inflation expectations.

"So far, we are seeing some signs, but they are modest. Let's wait for more data and let's not pre-empt the MPC," he said.