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Record Reserves Create Costly Cash Pile for RBI

Record Reserves Create Costly Cash Pile for RBIRecord Reserves Create Costly Cash Pile for RBI

As India’s foreign exchange reserves march toward the unprecedented $400 billion mark, its central bank faces a costly conundrum, PTI reported. To keep the rupee stable and exports competitive, it is having to mop up inflows that’s adding cash to the local banking system. Problem is, banks are flush with money following Prime Minister Narendra Modi’s demonetization program last year, leaving them already struggling to pay interest on the deposits in an environment where loans aren’t picking up. The resulting need to absorb both dollar- and rupee-liquidity is stretching the Reserve Bank of India’s range of tools and complicating policy. Costs to mop up these inflows have eroded the RBI’s earnings, halving its annual dividend to the government. “The RBI would be paying more on its sterilization bills than it gets on its reserve assets, so it would cut into its profits,” said Brad W. Setser, senior fellow at New York-based think-tank Council on Foreign Relations. “Selling sterilization paper in a country with a relatively high nominal interest rate like India is costly.”

 

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