SBI Chairman: Artificial intervention does not work

Speaking to The Indian Express, Kara said, “I think it (central bank intervention) is really not working…. Artificial intervention doesn’t really have a long-term impact, it can only have a temporary impact.

However, he added that we should instead focus on the trade balance. “Compared to that, I’d say if the trade balance is in our favor at all, it might work better.”

The RBI has intervened from time to time to curb the rupee’s volatility by selling dollars and buying rupees from the market, and over the past six months this has led to a depletion of foreign reserves.

“A large part of our foreign exchange reserves is already gone. From over $600 billion, we are now at $580 billion,” Kara said.

It is important to note that in the first week of September 2021, foreign reserves stood at $642.4 billion, and on July 8, 2022, they fell to $580 billion—a drop of $62 billion in ten months. During the same period, the rupee has weakened by nearly 10 percent from 72.96 to 80 to the dollar.

Although the RBI has taken several measures, including temporarily allowing banks to raise new deposits in FCNR (B) and NRE without reference to existing regulations on interest rates, in a bid to attract foreign investment, Kara said it has to wait and to watch to see the impact of these measures as banks raised rates just a week ago.

“FCNR (deposit scheme) is a very interest sensitive product. And we are seeing that interest rates are on the rise in various markets. But it usually happens when it comes to NRE rupee, usually the flows go up when the rupee weakens. And it is also a refundable account. The type of relief that RBI has provided is perhaps mainly for the FCNR (B) scheme. We also increased the interest rate on July 10. It is too early to really gauge what the likely impact is. We have to wait and watch,” Kara said.

While FDI and FDI investments are key to the rupee’s stability and India has witnessed a sharp outflow of over Rs 2.64 lakh crore by foreign portfolio investors from Indian equity markets since October 2021, Kara said investors seeking FDI investments are looking at India with a lot of interest and India’s ‘political stability’ is a big contributing factor.

“All of them are watching India with great interest. But yes, maybe they will wait and watch, because especially many of them when it comes to FDI invariably come with a very long-term perspective. Some of the long-term sole investors view the country with great interest for the simple reason of political stability and also the way a country has been accepted globally in the recent past. I think those are some of the comfort factors that these investors are paying attention to.”