The Reserve Bank of India (RBI) on August 10 sought to allay concerns about the possible withdrawal of Russian investment in local government debt, saying it did not expect the domestic liquidity situation or the rupee's exchange rate to come under pressure from such an outflow.
Speaking to media following the bi-monthly meeting of the monetary policy committee, which held the policy repo rate steady at 6.5 percent for the third time in a row, governor Shaktikanta Das and deputy governor T Rabi Sankar refused to say how much Russia had invested in Indian government securities as it would not be proper to do so for any country or entity.
"Will there be a liquidity implication (when the securities mature) of that? We will have to see. It is within the system; the rupee balance is within the system buying instruments within the system. It should not have any significant liquidity impact," Rabi Sankar said.
In July 2022, the central bank announced a framework for the settlement of international trade in rupees. Under the framework, any surplus rupees held in Vostro accounts can be utilised for permissible capital and current account transactions such as payments for projects and investments, export and import advance flow management and investment in government securities subject to limits and guidelines.
While India and Russia did settle their trade in rupees following the setting up of the framework, the system did not take off as hoped as Moscow soon accumulated a surplus to the tune of billions of rupees on account of New Delhi’s oil purchases.
According to a source, the facility to invest surplus rupees in Indian government securities has, so far, not been used at all as it is not an attractive proposition.
Also read: India pins hopes on bilateral local currency trade to internationalise rupee
News agency Reuters, citing bankers, said on August 1 that Russia had mostly invested its surplus rupees in short-term treasury bills rather than longer-duration government bonds.
Inaccurate estimates
In its report, Reuters referred to an estimate by CLSA that India had paid for up to $30 billion of Russian oil in rupees and this may be invested in Indian government debt.
However, on August 10, Rabi Sankar cautioned against the numbers doing the rounds in the market.
"It may not be accurate to think that the trade surplus is staying in the country because a large part of that is oil. Oil, up to the global cap, can be paid through normal channels. So most of it is getting paid. Some of it could be remaining as rupee balances in SRVA (Special Rupee Vostro Accounts) accounts. So don't include the trade balance of $40 billion or something to the amount that must remain within the country," Rabi Sankar said.
Russia had a merchandise trade surplus of $43.1 billion with India in 2022-23.
On his part, Das said there was no reason to expect any country to suddenly pull its investments from India.
"Why should a country pull out (of India)? It is a continuing trade relation. So therefore we don't see any stress or any concern with regard to the quantum that would be held in the Vostro accounts from various countries," Das said.
The governor added that the RBI had enough buffers in the form of foreign exchange reserves – the reserves stood at $603.87 billion on July 28 – to tackle any issues.
"Last year, for example, after the commencement of the war in Ukraine, there were market fears that the rupee will crash, depreciate to such and such levels and various numbers were mentioned in the market but none of that happened because RBI was there in the market and RBI is always there in the market," Das said, referring to the central bank's market interventions to reduce undue volatility in the rupee's exchange rate.
"So we are confident of dealing with such situations if at all they arise. But we don't see that happening," he added.
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