India’s central bank has enough tools to absorb a record surge in banking-system liquidity following its massive foreign-currency deposit drive, Governor Sanjay Malhotra said Friday, as policymakers seek to prevent the cash glut from pushing borrowing costs lower and fueling inflation.
The Reserve Bank of India will use all available measures to withdraw surplus funds, Malhotra said in an interview with CNBC TV18. “We are alert to that. We have enough tools,” he said, citing open-market operations and swaps. “Nothing is off the table.” The governor, however, ruled out raising the cash reserve ratio to absorb liquidity created by the foreign-currency deposits.
The comments come as the central bank has begun draining cash from the financial system through tools including variable reverse repo auctions and currency swaps. The urgency to absorb excess liquidity has grown as abundant cash risks keeping financial conditions looser than the RBI may be comfortable with.
Minutes of the central bank’s August meeting showed policymakers were already turning more hawkish. The RBI’s next monetary policy meeting is scheduled for Oct. 5-7.
India’s excess banking liquidity recently hit 11 trillion rupees ($115 billion), a peak for the measure. The deluge followed a $127 billion inflow from the country’s vast diaspora, surpassing even the most optimistic estimates and giving policymakers a bigger war chest to defend the currency.
Liquidity has risen in the banking system as lenders swapped their dollars with the central bank in exchange for rupees. On Friday, the RBI rejected some bids at a sale of shorter-maturity debt, a rare occurrence, which market players interpreted as a sign of the authority’s discomfort with investors demanding higher yields from government bonds.
Malhotra also pushed back against estimates that the deposit drive will prove costly, saying the inflows will instead generate additional income. Analysts estimate the foreign fund raising to cost the RBI as much as $10.6 billion over a five year period.
Growth Risks
Malhotra said the RBI’s monetary policy stance is “appropriate,” with no signs of “overheating even in the consumption loans.” The central bank was also “not entirely surprised” by stronger-than-expected growth in the April-June quarter, he said. Incoming corporate data is pointing to firmer growth as well.
“The Indian economy has weathered this shock really well,” the governor said.
India’s economy grew 7.8% in the April-June quarter, data released last month showed, exceeding analysts’ expectations and the RBI’s own forecast, though questions remain over how fully the headline numbers reflect growth on the ground.
Higher energy prices add another risk to the outlook. Crude oil has climbed above $100 a barrel, a key concern for India, which imports about 90% of its crude requirements. A sustained rise in prices could fuel inflation and weigh on growth.
India’s retail inflation is expected to edge higher in the coming months, with data due Monday forecast to show consumer prices rising to 4.86% in August from 4.45% in July.
–With assistance from Subhadip Sircar, Siddhi Nayak and Bhaskar Dutta.
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