RBI Governor: Rupee undervalued as FCNR(B) inflows top $32 billion

The Reserve Bank of India has pulled in nearly $32 billion through FCNR(B) deposits since its June policy measures, Governor Sanjay Malhotra told The Hindu BusinessLine in an interview published Sunday. Government securities added another $7 billion in foreign inflows over the same period.

Malhotra dismissed the idea that the inflows simply recycle existing deposits. The RBI has enough tools to manage the resulting liquidity, he said. The inflows have strengthened India's external position against a backdrop of geopolitical uncertainty and volatile capital flows, the governor added.

On the hedging cost the RBI bears for fresh FCNR(B) deposits and concessional forex swaps for public-sector ECBs, Malhotra pushed back. "It is not something which should be a matter of concern because we have a foolproof system of insuring ourselves," he said. "Whatever dollars we get, the excess foreign currency is invested in foreign assets. The risk, therefore, is not there."

The measures should be read as a response to challenging global conditions facing emerging markets, Malhotra said. They are expected to strengthen India's balance of payments and currency stability.

Rupee undervalued, no target band

Malhotra sought to reassure markets on the currency. Recent depreciation, he argued, does not reflect any weakness in economic fundamentals. The pressure has come from geopolitical tensions, dollar strength and broader emerging-market volatility.

"We do not target any specific exchange rate or band for the rupee," he said. "Our intervention, whenever necessary, is targeted to curb excessive volatility." The currency is "not overvalued" and could even be considered undervalued in both nominal and real effective exchange rate terms, he said.

He pointed to the current account surplus during April-May, strong services exports, resilient remittances, rising merchandise exports and improving FDI flows as signs of external-sector strength.

On forex reserve management, Malhotra said the RBI continues to be guided by safety, liquidity and returns, with periodic reviews of reserve deployment.

Inflation first, growth second

Turning to monetary policy, Malhotra reiterated that inflation control remains the RBI's foremost priority even as it stays mindful of growth risks. The Monetary Policy Committee will remain data-dependent while managing the growth-inflation trade-off, he said.

"Our primary mandate is inflation and price stability," Malhotra said. "We will do whatever is required first, to keep price stability and then, to see to what extent we can support growth."

Inflation has moved above the 4% midpoint of the MPC's target band. Malhotra indicated the committee does not yet see signs of broad-based price pressures becoming entrenched.

He defended the current policy rate as reflecting prevailing growth-inflation dynamics and elevated global uncertainties. The MPC's neutral stance, he noted, provides flexibility to maintain the status quo or move rates in either direction depending on incoming data. Decisions are guided by domestic conditions rather than policy actions of global central banks.

Credit growth not overheating

Malhotra downplayed concerns that strong credit growth could lead to overheating. Credit creation generates deposits, he said, while capital adequacy, liquidity coverage and stable funding ratios remain the key constraints on lending. Indian banks remain well positioned on these parameters.

On governance, Malhotra said the RBI's regulatory and supervisory framework remains robust. Growing foreign interest in Indian banks and NBFCs reflects confidence in the financial system and long-term growth prospects. Ownership norms will continue to emphasise fit-and-proper criteria and diversified shareholding structures, he said.