RBI keeps close watch on banks’ overseas transactions

The Reserve Bank of India (RBI) is keeping a close watch on all payments by Indian banks. According to sources which are closely related to the development say the central bank is doing close screening of the data of foreign and some of the private banks which acts as custodians for foreign institutional investors (FIIs). Indian banks, both public and private sector banks send funds to their foreign branches for everyday requirements in the inter-bank market and for client commitments.

According to RBI sources although banks report transactions fortnightly and monthly but it is keeping a close watch on a daily bases on the transactions. The objective behind the close screening is to check the flight of capital under the guise of repatriation of portfolio investments.

Most of the foreign investors whether banks, parents of foreign banks, private equity players or foreign funds all of them have done considerable investments in Indian entities through both foreign direct investment (FDI) and FII routes.

As per close sources last week RBI has showed concern about the flight of capital therefore came up with capital combination for both public and private banks.

Hence, RBI wants to keep a check on flight of capital which has come as direct investment, and some of have a lock-in period facility attached to it. Regarding the portfolio investment the main aim is to see if all remittances have an underlying or physical settlement. A source said, “One needs to check if such remittances comply with the Foreign Exchange Management Act”.

However till no untoward has come into notice, then also RBI is trying to ensure that the transactions are done in an orderly manner and all the norms are followed. This move of RBI has come at the time when the growing global dollar crisis has forced the financial institutions to depend on regulatory support.

Since January 2008, in Indian equity markets FIIs have been net sellers to the tune of $10.83 billion.

Such conditions of the market has increased in withdrawal of funds which has put pressure on the rupee and in turn has led to a substantial reduction in foreign exchange reserves, which is partly credited to the RBI’s intervention in the forex markets to ensure that the rupee does not depreciate too much. Since January, there has been drop in the rupee of nearly 23 per cent as against the US dollar. It closed at 48.47 against the dollar on Friday.

As per the latest RBI data India’s foreign exchange reserves have fell almost $10 billion during the week ended October 10 to $274 billion. Whereas the reserves have lowered by $35 billion at the end of March 2008, though there is still an increase of around $23 billion on a year-on-year basis.