RBI Chief Defends Rupee Valuation as Foreign Inflows Surmount $32 Billion Threshold

External Capital Buffers and Deposit Surges

In a strategic push to reinforce India's financial defenses against global market turbulence, Governor Sanjay Malhotra confirmed that the Reserve Bank of India (RBI) has overseen a significant influx of foreign capital. Banks have concentrated nearly $32 billion, primarily through Foreign Currency Non-Resident (Bank) or FCNR(B) accounts. Furthermore, government securities have attracted upward of $7 billion since the implementation of June's policy adjustments.

Addressing skepticism regarding the nature of these funds, Malhotra clarified in a recent interview that these represent fresh capital rather than a simple recycling of existing domestic deposits. He maintained that the central bank possesses the requisite instruments to navigate the resulting liquidity without destabilizing the broader economy.

Currency Valuation and Reserve Management

The Governor directly challenged perceptions of currency weakness, asserting that the rupee is "not overvalued" and may, in fact, be currently undervalued when measured against both nominal and real effective exchange rate benchmarks. Malhotra attributed recent downward pressure on the currency to external factors, including geopolitical conflict, a strengthening U.S. dollar, and general volatility across emerging markets, rather than domestic economic failures.

Key indicators supporting the external sector's health include:

• A reported current account surplus during April and May.
• Resilient growth in services and merchandise exports.
• Steady remittance inflows and improving Foreign Direct Investment (FDI) trends.

Regarding the costs associated with FCNR(B) hedging and concessional forex swaps for public sector entities, Malhotra dismissed solvency concerns. He explained that excess foreign currency is reinvested in foreign assets, creating a self-insuring mechanism that mitigates risk.

Monetary Mandate and Banking Oversight

While the Monetary Policy Committee (MPC) acknowledges growth risks, Malhotra reiterated that price stability remains the primary directive. With inflation trending above the 4% target midpoint, the RBI plans to maintain a data-reliant path, resisting the urge to follow the policy maneuvers of global central banks prematurely. The current neutral stance is intended to provide tactical flexibility for future rate adjustments.

Finally, Malhotra addressed the stability of the financial sector, dismissing fears of credit-driven overheating. He pointed to robust capital adequacy and liquidity coverage ratios among Indian lenders as evidence of a healthy banking system. The Governor noted that increasing foreign interest in domestic financial institutions reflects broader confidence in the RBI's regulatory framework and the nation's long-term economic trajectory.

Source: The Hindu — Home