BS News Agency: In the context of strong foreign capital inflows into India and continuous growth in foreign exchange reserves, the central government has brought forward an important assessment of the financial management of the Reserve Bank of India (RBI). According to the government, the monetary measures taken to manage the huge inflow of dollars and control the exchange rate of the rupee will not create any significant financial burden on the RBI. Thanks to the current liquidity trend in the banking system, controlled profit rates and strong interest income from the US Treasury, the central bank is able to comfortably manage its own operating expenses, which will not affect the government's dividend.
No major financial pressure on the central bank
According to media reports, the government is expecting that the RBI will not incur any major expenses from the record $127 billion funds collected through the swap-facilitated foreign exchange program. Some experts feared that the high hedging and liquidity management costs of the Foreign Currency Non-Resident-Bank (FCNR-B) and other overseas programmes could put pressure on the central bank. However, government sources claim that investing this huge amount of funds in the US Treasury would yield huge profits. Meanwhile, the annual return on investment in the 52-week US Treasury bill maturing on August 31, 2026, stands at 4.14%.
Hedging costs and central bank risk
According to a section of economists, the RBI may have to spend a large amount to absorb excess liquidity and manage exchange rate risk due to dollar inflows. According to Madan Sabnabish, chief economist at Bank of Baroda, the swap cost could cost around Rs 36,000 crore, which could slightly reduce the bank's income and impact the Contingent Risk Buffer (CRB) in the next three to five years. However, policymakers believe that this potential loss will be easily offset by interest earned on foreign currency assets invested in US Treasuries. In addition, it is expected that the market will easily absorb this excess liquidity due to rapid economic growth.