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RBI Says Foreign Reserves Will Generate Income Amid Liquidity Surge
India’s banks received a very large amount of money after people living abroad deposited foreign currency.
This left banks with about 11 trillion rupees in extra cash.
The Reserve Bank of India wants to remove some of that cash from the financial system.
It says it can use several tools, including auctions, swaps and bond-market operations.
The goal is to stop borrowing costs from falling too much and to limit inflation risks.
Governor Sanjay Malhotra says the deposit program will earn money for the central bank.
Some analysts disagree and estimate that it could cost billions of dollars over five years.
India’s economy is growing strongly, but expensive oil and higher consumer prices could create problems.
RBI Governor Sanjay Malhotra said the central bank has enough tools to withdraw surplus banking-system funds.
Excess liquidity reached 11 trillion rupees, or about $115 billion, after a $127 billion diaspora inflow.
The RBI is using reverse repos, currency swaps, open-market operations and other measures, while ruling out a higher cash reserve ratio.
Malhotra said the foreign-currency deposit drive will generate income, while analysts estimate it could cost the RBI $10.6 billion over five years.
India’s economy grew 7.8% in April-June, but higher oil prices and rising inflation remain risks.
- Who
- Reserve Bank of India Governor Sanjay Malhotra and the Reserve Bank of India.
- What
- The RBI is managing a record increase in banking-system liquidity following a large foreign-currency deposit inflow.
- Where
- India’s banking and financial system.
- When
- The comments were made on Friday; the RBI’s next monetary policy meeting is scheduled for October 5-7.
- Why
- To absorb surplus cash and reduce the risk that looser financial conditions will push borrowing costs lower or fuel inflation.
RBI Governor’s View
Analysts’ View
Financial impact of foreign-currency deposits
RBI Governor’s View
Sanjay Malhotra said the deposit inflows will generate additional income for the RBI.
Analysts’ View
Analysts estimate the foreign fundraising could cost the RBI as much as $10.6 billion over five years.
Key facts
- Excess liquidity
- 11 trillion rupees, approximately $115 billion
- Foreign-currency inflow
- $127 billion from India’s diaspora
- RBI liquidity tools
- Variable reverse repo auctions, currency swaps, open-market operations and other measures
- Cash reserve ratio
- Malhotra ruled out raising it to absorb the additional liquidity
- Economic growth
- India’s economy grew 7.8% in the April-June quarter
- Oil risk
- Crude oil prices rose above $100 a barrel; India imports about 90% of its crude
- Inflation forecast
- Consumer-price inflation was forecast to rise to 4.86% in August from 4.45% in July
Quotes
Sanjay Malhotra
Governor of the Reserve Bank of India
“The Indian economy has weathered this shock really well.”
theprint.in
“We are alert to that. We have enough tools.”
theprint.in
Sources
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