Governor Sanjay Malhotra says the RBI’s tighter rules on rupee-linked derivatives are temporary measures to steady markets, while overseas investors can continue moving capital in and out of India.
The Reserve Bank of India’s latest foreign exchange curbs are meant to cool speculation, not to block cross-border capital, Governor Sanjay Malhotra said in an interview with Moneycontrol, seeking to calm market concerns that the measures amount to capital controls. Malhotra said the central bank’s aim is to keep the rupee market orderly while preserving the ability of overseas investors to move money in and out of India.
According to the RBI governor, the restrictions do not touch capital account flows. Non-residents can still invest in equities, debt and corporate bonds, and can continue to use external commercial borrowings and hedging tools. The central bank’s new requirements instead focus on foreign exchange derivative contracts linked to the rupee, especially those with a notional value above $2 million.
The move follows an RBI circular on October 10 that introduced a foreign exchange reserve ratio, or FERR, requiring authorised dealers to maintain a cash reserve with the central bank equal to 20% of the rupee value of each qualifying transaction. Moneycontrol and News18 reported that the measure is aimed at foreign exchange derivatives used to hedge current-account exposures, rather than at capital flows. Malhotra said the central bank is determined to do whatever is needed to preserve external stability without resorting to capital controls.
Business Standard reported earlier that the RBI’s recent tightening on banks’ positions and non-deliverable forwards was prompted by heightened volatility, including arbitrage activity between onshore deliverable markets and offshore NDF markets. Malhotra has now indicated that these are response measures, not a permanent change in policy, and that the RBI still wants to deepen markets and support the internationalisation of the rupee. He also said he remained upbeat about India’s medium- and long-term balance of payments outlook despite current market unease.
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