Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday strongly defended the decision to advance the closure of the FCNR(B) swap window by a month, describing it as a well-thought-out, calibrated, prudent and data-driven response to evolving conditions.
“It will not be correct to call it a U-turn; it is rather a calibration,” Malhotra said. The move demonstrated the central bank’s ability to remain flexible and data-dependent amid rapidly changing conditions, he added.
Responding to criticism that his remarks after the August 5 Monetary Policy Committee (MPC) meeting had ruled out an early closure, Malhotra said the RBI was still assessing a situation that was evolving rapidly.
“I would like to highlight the use of the words ‘as of now’ when I mentioned that there was no proposal to advance the last date,” he said. The RBI had also said it would keep stakeholders informed of any decision, clearly indicating that an early closure had not been ruled out, he added.
According to Malhotra, the decision was taken from a position of strength. The RBI expects the three schemes—FCNR(B), external commercial borrowings (ECBs) and overseas foreign currency borrowings (OFCBs)—to attract at least $80 billion. This reflected the country’s strong macroeconomic fundamentals and would further strengthen its balance of payments, he said.
Inflows had been stronger than the RBI and most market participants had expected. “There is a diminishing marginal utility of every dollar that is swapped. At the same time, there is an increasing marginal cost because you need to sterilise it for a longer period,” Malhotra said.
While the announcement may have appeared sudden, stakeholders had been given more than two weeks to make the necessary arrangements and benefit from the scheme during the remaining period, which the RBI considered sufficient, he added.
The underlying objective of the facility—to attract foreign currency assets and strengthen the external sector—remained unchanged. The decision to close the temporary facility early was part of the RBI’s external-sector management, Malhotra said.
On the cost and contingent liability for the RBI, Malhotra said the foreign currency assets received through the swaps would appear as foreign currency assets on the central bank’s balance sheet, increasing its size. The outstanding forward leg would be shown as a contingent liability and remain an off-balance-sheet item.
On the rupee and the RBI’s record net short forward-dollar position, Malhotra said the position remained “very manageable”. It was primarily the result of swaps previously undertaken to infuse liquidity and the latest facilities intended to strengthen the balance-of-payments position.
“The exchange rate continues to be market determined. Our policy on intervention remains the same, which is to curb excessive volatility and any undue speculative activity,” he said. The RBI remained committed to ensuring orderly financial conditions and orderly movements in the exchange rate, he added.
On monetary policy, Malhotra said domestic growth-inflation dynamics would remain the principal determinant of monetary policy, though global macroeconomic conditions and geopolitical developments would also be taken into account because of their impact on the Indian economy, Malhotra said.
On risks from the monsoon and El Niño, the governor said the rainfall deficit was about 12.6% and net sowing was 2% lower than last year. However, food buffers were adequate and the government had been proactive in managing supply-side pressures. Agriculture had also become more resilient to monsoon-related uncertainty because of better farming practices, drought-resistant seeds and increased irrigation coverage. The RBI nevertheless remained watchful of the risks.
Malhotra also expressed confidence in the health of banks and non-banking financial companies. Banks had a capital-to-risk-weighted-assets ratio of nearly 18% and a liquidity coverage ratio of about 127%. Gross and net non-performing asset ratios stood at 1.7% and 0.4%, respectively. The RBI’s biannual stress tests indicated that banks would remain resilient and retain sufficient capital to absorb shocks even under highly adverse conditions, he said.
“As of now, we do not see any vulnerability in any particular sector,” Malhotra said. The RBI’s supervisory team was continuously monitoring developments through real-time and off-site supervision, and there were no major risks emerging at the systemic level.
On the RBI’s move towards principle-based regulation, Malhotra said its approach was to make regulation proportionate to the risks and capabilities of regulated entities. Although regulations continued to combine rules and principles, the RBI was increasingly moving towards a principle-based framework.