Have Adequate Buffer To Manage Russian Fund Outflows, RBI Assures Banks

The RBI officials in informal meetings with bankers and market participants have assured that it had adequate buffers to manage eventual outflows of Russian funds.

With India's imports surpassing exports, Russian companies have accumulated significant amounts of rupees.

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The Reserve Bank of India has reassured banks that it is prepared to handle any market impact resulting from the outflow of Russian funds held in rupees with local banks. According to a Reuters report, the central bank officials in informal meetings with bankers and market participants have assured that it had adequate buffer to manage eventual outflows of Russian funds. 

Following Russia's invasion of Ukraine, a slew of Western sanctions limited Russia's ability to use the US dollar in trade. India used currencies like the dirham, yuan, and rupee to buy discounted Russian crude oil. However, With India's imports surpassing exports, Russian companies have accumulated significant amounts of rupees. These are stored in Vostro accounts with Indian banks.

According to the report, the RBI has allowed these funds to be invested in local government bonds until repatriation. Although the report said that bankers were concerned about potential outflows of these funds and how it will impact them. 

The Reuters report citing four bankers and one market participant said that the RBI expects an eventual outflow of these funds and has assured market participants that it is adequately prepared to prevent any impact on the rupee. 

"Whenever banks have expressed concerns about potential outflows on the forex and debt market, the RBI has always responded positively," a treasury official at a PSB told the news agency. 

The Reserve Bank of India (RBI) has not disclosed the exact amount of funds held in rupees by Russian companies. However, as per the report, brokerage firm CLSA has estimated that around $20-$30 billion of Russian oil imports have been paid for in rupees and could potentially be invested in government debt.

Bankers said that the impact of outflows would be more on the forex market than on the debt market since the funds are invested mostly in short-term treasury bills rather than longer-duration government bonds. 

"One of the reasons why the RBI has continued to build forex reserves is to ensure it is adequately covered at the time of any outflows," the banker told Reuters. 

The RBI has been accumulating foreign funds in the equity market, leading to an increase in its foreign exchange reserves, which reached a more-than-one-year-high of $607 billion, the report noted. Additionally, the RBI holds forward dollar holdings of $19.27 billion as of May.

In the event of a sharp spike in treasury bill yields, the RBI could provide liquidity infusion as a backstop and retain the option to intervene in the spot forex market to safeguard the rupee, as per the report.