RBI keeps keen eye on banks' overseas deals

The central bank is looking to check flight of capital under the guise of repatriation of portfolio investments.

The Reserve Bank of India (RBI) is keeping close tabs on all remittances by Indian banks.

The screening of data is more intense in the case of foreign and some private banks which act as custodians for foreign institutional investors (FIIs), according to sources close to the development. Indian banks, both public and private, send capital to their foreign offices for everyday requirements in the inter-bank market and for client commitments.

While banks report transactions fortnightly and monthly, sources say the RBI is keeping a close watch on a daily basis. Sources say the objective is to check flight of capital under the guise of repatriation of portfolio investments.

Most foreign investors — be it banks, parents of foreign banks, private equity players or foreign funds — have substantial investments in Indian entities through both foreign direct investment (FDI) and FII routes.

Sources said the fear of flight of capital was one reason the RBI last week came up with capital infusion for both public and private banks.

The RBI wants to keep a check on flight of capital that has come as direct investment, some of which has a lock-in period as well. In the case of portfolio investment, the objective is to see if all remittances have an underlying or physical settlement. “One needs to check if such remittances comply with the Foreign Exchange Management Act,” said a source.

While nothing untoward has been noticed so far, the RBI is trying to ensure that the transactions are done in an orderly fashion and that all the norms are followed. The move comes at a time when the growing global dollar crisis has increased the dependence of financial institutions on regulatory support.

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

Continued withdrawal of funds has put pressure on the rupee and led to a substantial reduction in foreign exchange reserves, which is partly attributed to the RBI’s intervention in the forex markets to ensure that the rupee does not depreciate too much. Since January, the rupee has dropped nearly 23 per cent against the US dollar. It closed at 48.47 against the dollar on Friday.

Latest RBI data show India’s foreign exchange reserves fell almost $10 billion during the week ended October 10 to $274 billion. While the reserves are $35 billion lower than at the end of March 2008, there is still an increase of around $23 billion on a year-on-year basis.