Reserve Bank of India (RBI) Governor Sanjay Malhotra has said the central bank’s recent foreign exchange curbs are aimed at restricting speculative trades and should not be viewed as capital controls. The clarification comes days after the RBI further tightened foreign exchange norms to streamline trading.
Malhotra reiterated that capital account transactions have been excluded from the recently imposed foreign exchange reserve ratio (FERR) requirements.
“This is in no way a capital control measure,” Malhotra said in an exclusive interview to Moneycontrol, dismissing market concerns that the measures could limit foreign investment flows.
He said non-residents can continue to invest in equities, debt and corporate bonds, as well as through external commercial borrowings (ECBs), and hedge their positions.
Governor On RBI’s Interventions
“In respect of all foreign exchange derivative contracts involving Rupee that are for notional value exceeding $2 million equivalent, authorised dealers shall be required to maintain with the Reserve Bank an FERR in cash, equal to 20 percent of the INR equivalent of the notional amount of each transaction,” the RBI circular dated October 10 said.
The newly introduced FERR will affect foreign exchange derivative contracts involving the rupee, undertaken to hedge current account exposures where the user buys foreign currency against the Indian rupee.
Malhotra stated that the central bank’s interventions constituted regulatory measures rather than capital restrictions, emphasising their purpose of facilitating legitimate hedging activities while discouraging speculative trading.
Tackling Macroeconomic Challenges
He further indicated that the regulatory authority stands ready to implement additional measures to facilitate controlled fluctuations in the rupee’s value.
“So, my confidence comes from, you know, the earlier episodes where every time we have been given a challenging situation, we have come up with our own set of measures, and this time, especially given that our macroeconomic fundamentals are very strong and the resolve is very strong, we shall be able to ensure that we have a stronger external sector,”SANJAY MALHOTRA, RBI GOVERNOR
On tackling macroeconomics, the governor said that every situation is different; it requires different tools and allows us to improve. The Russia-Ukraine war, for example, prompted us to introduce India’s own set of measures and strengthen our resilience. For COVID-19, that was more of a liquidity challenge. The current situation is more of an external-sector challenge.
“So, my confidence comes from, you know, the earlier episodes where every time we have been given a challenging situation, we have come up with our own set of measures, and this time, especially given that our macroeconomic fundamentals are very strong and the resolve is very strong, we shall be able to ensure that we have a stronger external sector,” he added.
Policy For Stability
Regarding whether the Monetary Policy Committee would increase repo rates to stabilise the rupee, Malhotra refrained from providing a direct response. However, he acknowledged that monetary policy decisions carry implications for financial stability.
The RBI established an initial requirement mandating that banks maintain a 20% cash reserve against foreign exchange derivatives utilised by clients for hedging current-account exposures.
This requirement was subsequently broadened to encompass all rupee-denominated foreign exchange derivatives, including transactions where authorised banks acquire foreign currency in exchange for the rupee to mitigate exposure from their own assets and liabilities.
Malhotra explained that the RBI implemented this reserve requirement following identification of disproportionate speculative activity concentrated on the dollar-purchasing segment of the foreign exchange market.
“We have already taken some measures to this effect. The government has also taken some measures. And if required, together, we will take more measures. But we will certainly ensure that markets are orderly, that there is no excessive volatility, and that there is no excessive speculation; we will do whatever is required to ensure this. We have enough tools in our kit to deploy, and you will not find RBI wanting when it comes to ensuring orderly conditions in the market.”, RBI GOVERNOR
According to Malhotra, market participants demonstrate excessive pessimism regarding the rupee’s trajectory. He clarified that exchange rate movements result from equilibrium between market demand and supply forces, and the central bank does not pursue a predetermined exchange rate target.
RBI on US Influence In Global Fiscal Space
On the question of US influence in the global markets, he said, “I feel it is primarily dependent on domestic growth and inflation. However, both are affected by external developments, so it is not completely insulated from what happens elsewhere.”
According to Malhotra, what is happening around the world, including interest rates, is something that we do keep in mind while deciding monetary policy, because they have an impact not only on India’s growth and our inflation, but also on the country’s real or neutral rate of interest.
RBI Governor Sanjay Malhotra
He said that monetary policy must take these changes into account.
Regarding yields, he explained that elevated yields in developed economies stem from two principal factors: first, the substantial inflation experienced in these regions means that real interest rates may not be proportionally elevated; and second, the considerable public debt burdens in these economies necessitate higher interest rates compared to our own.
Message To Market
Notwithstanding these distinctions, while the fundamental causes may vary across different nations, they nonetheless exert significant influence as previously noted, on global interest rates and capital flows, thereby bearing considerable relevance.
When asked for a message to the markets at large, Malhotra said that the overall message is that we are very optimistic. Not only because of India’s domestic macroeconomic story. According to him, India’s inherent resilience and strength, and our resolve that we will come out stronger through each episode, through each challenge.
“We have already taken some measures to this effect. The government has also taken some measures. And if required, together, we will take more measures. But we will certainly ensure that markets are orderly, that there is no excessive volatility, and that there is no excessive speculation; we will do whatever is required to ensure this. We have enough tools in our kit to deploy, and you will not find RBI wanting when it comes to ensuring orderly conditions in the market.”, Malhotra added.
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