India central bank assures banks it can handle Russian fund outflows -sources
India central bank assures banks it can handle Russian fund outflows -sources
India’s Rupee Impact Over Russian Funds Outflow: RBI Assures Bankers
August 1, Mumbai – The Reserve Bank of India (RBI) has provided assurance to bankers that it is prepared to manage any market impact resulting from the outflow of Russian funds held in rupees with local banks, according to banking sources. Amid Western sanctions limiting Russia’s use of the US dollar for trade, India has been accepting payment in other currencies, including the dirham, yuan, and rupee. As a result, local banks have accumulated billions of rupees from Russian companies, which the RBI has allowed to be invested in local government bonds until repatriated.
Bankers have expressed concerns about the eventual outflows of these funds, but RBI officials have reassured them that they have sufficient buffers to handle the situation. A treasury official from a state-run bank commented, “Whenever banks have expressed concerns about potential outflows on the forex and debt market, the RBI has always responded positively.” The RBI’s proactive approach to addressing these concerns has brought much-needed confidence to the banking sector.
Although the RBI has not disclosed the exact amount of these funds, research conducted by brokerage firm CLSA estimates that approximately $20-$30 billion of Russian oil imports have been paid for in rupees and may be invested in government debt. As a result, the impact of outflows would likely be more significant on the forex market compared to the debt market. This is because the funds are primarily invested in short-term treasury bills rather than longer-duration government bonds, as explained by three bankers.
Despite the expected outflows, the RBI has assured market participants that it is fully prepared to prevent any adverse effects on the rupee. The central bank has been diligently building up its forex reserves to ensure sufficient coverage in times of outflows. Currently, the RBI’s foreign exchange reserves stand at a more-than-one-year high of $607 billion. Additionally, the bank holds forward dollar holdings of $19.27 billion as of May, further bolstering its position.
In the event of a sudden spike in treasury bill yields, the RBI would provide backstop through liquidity infusion. It would also retain the option to intervene in the spot forex market, if necessary, to protect the rupee’s stability. Bankers have noted that the RBI’s ability to proactively address concerns and offer support demonstrates the central bank’s commitment to maintaining stability in the financial markets.
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Overall, the RBI’s reassurance to bankers regarding the potential impact of Russian funds outflow provides much-needed confidence in India’s financial system. By assuring market participants and utilizing its strong forex reserves, the RBI demonstrates its commitment to managing any potential market disruptions effectively. As India continues to navigate the complexities of global trade dynamics, the central bank’s preparedness serves as a reassuring presence for the country’s banking sector and the broader economy.
