Bulk of India Inc's overseas debt is hedged: RBI governor Shaktikanta Das

No particular level of rupee in mind but have zero tolerance for volatile movements: Das

At a time when the unhedged exposure of Indian companies to overseas borrowing has stoked concerns about a depreciating rupee, Reserve Bank of India (RBI) Governor Shaktikanta Das has said a predominant part of the outstanding external commercial borrowings (ECBs) has been effectively hedged.

“It is necessary to look at the so-called unhedged forex reserves in their proper context instead of getting carried away...by what is revealed on the surface,” Das said at an event in Mumbai on Friday. “We have no particular level of the rupee in mind, but we would like to ensure its orderly evolution and we have zero tolerance for volatile and bumpy movements,” he added.

The rupee has faced considerable pressure against the dollar in recent months due to record foreign outflows from the domestic equity markets amid elevated commodity prices and higher US interest rates. The rupee broke past the psychological 80 per dollar mark earlier this week, prompting intervention from the RBI. However, it snapped an 11-week losing streak on Friday, settling at 79.85 against the dollar.

The June 2022 Financial Stability Report of the RBI said from the outstanding ECBs of $180 billion, about 44 per cent, or $79 billion, is unhedged, Das said. “This includes around $40 billion liabilities of public sector companies, mainly in the petroleum, railway and power sectors, which have assets with a natural hedge character,” he said. 

The remaining portion of around $39 billion, which represents 22 per cent of the total outstanding ECB exposure, includes borrowings by companies that have a natural hedge in the form of foreign currency earnings. “This would leave a very small portion of the total outstanding ECBs that are truly unhedged,” he added.

The RBI governor said foreign exchange risks of public sector entities could be absorbed by the government, if required, but such possibility was unlikely.

“In recognition of the fact that there is a genuine shortfall of forex in the market relative to demand because of import and debt servicing requirements, the Reserve Bank has been supplying US dollars to the market to ensure that there is adequate forex liquidity,” Das said. “This is the very purpose for which we had accumulated reserves. You buy an umbrella to use it when it rains,” he said, adding that the external sector was well-buffered to withstand the ongoing terms of trade shocks.

The latest data showed that the RBI’s foreign exchange reserves had dropped $7.5 billion to $572.71 billion in the week ended July 15. The reserves were around $630 billion at the end of February, when the Ukraine war broke out.

INFLATION PEAKING

While considerable uncertainties regarding the assessment of price rise remain, it would appear that inflation has peaked, Das said.

“It’s a very uncertain environment and we should not rush to any conclusion in such a great hurry. As it would appear, inflation appears to have peaked. Please mind my words, it has appeared to (have) peaked and it has moderated from 7.8 per cent...and now it is 7 per cent,” he said.

Inflation, as measured by the Consumer Price Index, eased to 7.01 per cent in June from 7.04 per cent a month ago, the NSO data showed. June marked the sixth consecutive month when CPI inflation was above the upper limit of the RBI’s target range of 2-6 per cent. The RBI’s medium-term target for the price gauge is 4 per cent.

Das said the current inflation targeting framework of the RBI had worked very well over the years, pointing out that average inflation till the onset of the Covid-19 pandemic was 3.9 per cent.

“Thereafter, we had a huge shock coming from Covid and because we have flexibility in-built into the target, the MPC decided to use that space to tolerate a slightly higher inflation, i.e higher than 4 per cent,” Das said.

“It is the flexibility in the inflation targeting framework that allowed the MPC and the RBI to reduce policy rates and inject huge amounts of liquidity and several other measures to fight the impact of Covid on the financial sector and the real economy,” he said.

The central bank appeared optimistic on the growth front as the governor said there has been a healthy pick-up in credit demand. Observing that India is relatively better placed in an uncertain environment, he said, “The financial system is well-capitalised, asset quality indicators have improved, balance sheets are stronger, and banks have returned to profitability.”

He added that the central bank would continue to remain watchful of the headwinds and would be proactive in taking measures as necessary to ensure financial stability.