RBI Governor Malhotra Calls Rupee Undervalued as FCNR(B) Inflows Surpass $32 Billion
The Reserve Bank of India (RBI) has reported that banks have mobilised nearly $32 billion through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits, with additional inflows of over $7 billion in government securities since the central bank's June policy measures. Governor Sanjay Malhotra, in an interview with The Hindu BusinessLine, stated that these inflows have strengthened India's external position amid global uncertainties.
Addressing concerns that the inflows might merely recycle existing deposits, Malhotra dismissed such worries, asserting that the RBI has adequate tools to manage any resulting liquidity. He also responded to concerns about the central bank bearing hedging costs, stating that the institution has a foolproof system of insuring itself by investing excess foreign currency in foreign assets, thereby mitigating risk.
On the rupee's recent depreciation, Malhotra argued that it does not reflect any weakness in India's economic fundamentals. He attributed the pressure to 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.
Malhotra highlighted indicators of external sector strength, including a current account surplus during April-May, robust services exports, resilient remittance inflows, rising merchandise exports, and improving foreign direct investment flows. On forex reserve management, he reiterated that the RBI continues to be guided by the principles of safety, liquidity, and returns, while periodically reviewing reserve deployment.
Discussing monetary policy, the Governor emphasised that inflation control remains the RBI's foremost priority, even as it remains mindful of growth risks. He stated that 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, Malhotra indicated that policymakers do not yet see signs of broad-based price pressures becoming entrenched.
Defending the current policy rate, Malhotra said it reflects prevailing growth-inflation dynamics and elevated global uncertainties. The MPC's neutral stance 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. He 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. Indian banks remain well positioned on these parameters, he added.
Addressing governance issues, Malhotra stated that the RBI's regulatory and supervisory framework continues to evolve to ensure financial stability.
