Rupee-dominated assets evince interest: RBI deputy governor BP Kanungo

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Published: August 27, 2019 2:09:09 AM

Rupee-denominated bonds, popularly known as Masala bonds, protect Indian companies issuing them from the exchange-rate risk since they raise debt from overseas markets in Indian rupees.

Gyrations in the forex market in these circumstances leave no option other than market intervention to restore orderliness in the market,” Kanungo said.

Indian rupee-denominated assets have witnessed a healthy interest from global institutions and investors and need to be given further ‘policy nudges’, Reserve Bank of India deputy governor BP Kanungo said.

Rupee-denominated bonds, popularly known as Masala bonds, protect Indian companies issuing them from the exchange-rate risk since they raise debt from overseas markets in Indian rupees.

Speaking at a Forex Association of India conference in Singapore on August 10, Kanungo also spoke of onshore markets needing further strengthening. “The policy regime is also oriented to providing adequate instruments of hedging to all resident economic agents who have exposure to a foreign currency as well as all non-residents who have a rupee exposure. The onshore markets are fairly deep and liquid, but needs further strengthening. There is a wide menu of hedging instruments available and further expansion would be in keeping with understanding of their risk implication.”

Kanungo’s theme for the speech was trade tensions between the US and China and the competitive protectionism through tariff barriers that seem to be contributing to the global economic slowdown. Trade tensions showed no signs of either a quick resolution or of escalation in near future, he pointed out. Other disruptive factors he listed out were the possibility of a ‘no-deal Brexit’ and uncertainty around the exit of Britain from the European Union, risks from geopolitical tensions in the Gulf and elsewhere.

He said even with the global economy ‘delicately poised’ is at this juncture, it is premature to think of de-globalisation. Globalisation is an irreversible process and progressing rapidly beyond expectation in recent times because of quantum advancements in communication and technology.

While globalisation has caused economies, markets, social interactions, education, etc to become intertwined, bringing with it problems and discontent, “wisdom lies in addressing them rather than disbanding the process”.

The deputy governor reiterated that the central bank’s intervention in the foreign exchange market is merely to curb sudden turbulences not backed by economic fundamentals, in line with its mandate to maintain orderly conditions in the market.

“Market operations are not intended to achieve any target exchange rate or band of rates. It must be pointed out that the exchange rate dynamics in India for more than a decade has been driven by capital flows rather than current account balances… Though long-term flows related to FDI and long-term debt have been fairly stable keeping in tandem with the economic fundamentals, the portfolio flows have their own dynamics depending as much on attractiveness of returns of Indian assets as the global factors determining their risk appetite.

Gyrations in the forex market in these circumstances leave no option other than market intervention to restore orderliness in the market,” Kanungo said.

He also said the country’s forex reserves are borrowed reserves and not built from export surplus. While reserves provide a bulwark against sudden flow reversals, they also enhance India’s ability to cope with the fallout and contribute to global stability as well.

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