The Reserve Bank of India has assured bankers that it can and will step in to manage any market impact due to the outflow of Russian funds held in rupees with local banks, at least four bankers and one market participant said on Tuesday.
Amid Western sanctions that restrict Russia’s use of the U.S. dollar for trade, India paid in other currencies, including the dirham, yuan and rupee, which local banks hold in special accounts.
And since India’s imports exceed exports, Russian companies have accumulated billions of rupees, according to its foreign minister, that the RBI has allowed to be invested in local government bonds until repatriated.
Bankers have been worried about the eventual outflows of these funds, but RBI officials have assured them in informal meetings that they have adequate buffers to manage such an eventuality, the banking sources said.
“Whenever banks have expressed concerns about potential outflows on the forex and debt market, the RBI has always responded positively,” said a treasury official at a state-run bank.
The official and other sources requested not to be named as they are not authorized to speak to the media. The RBI did not immediately respond to an email seeking comment.
The RBI has never disclosed the quantum of such funds, the sources said. But brokerage firm CLSA has estimated that $20-$30 billion of Russian oil imports have been paid for in rupees and may be invested in government debt.
The impact of outflows would be more on the forex market than on the debt market since the funds are invested mostly in short-term treasury bills rather than longer-duration government bonds, three bankers said.
Either way, the central bank expects an eventual outflow and has assured market participants that it is adequately prepared to prevent any impact on the rupee, one of the bankers said.
“One of the reasons why the RBI has continued to build forex reserves is to ensure it is adequately covered at the time of any outflows,” the banker said.
The RBI has been absorbing foreign money into the equity market, boosting its foreign exchange reserves to a more-than-one-year-high of $607 billion. It also had forward dollar holdings of $19.27 billion as of May.
If at all there is a sharp spike in treasury bill yields, the RBI could backstop through liquidity infusion while also retaining the option to intervene in the spot forex market to protect the rupee as needed, two bankers said.
Source: Reuters