On Episode 980 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Rotti, Tax Expert and CEO of tax advisory firm Tax Compaas as well as Rajeswari Sengupta, Associate Professor of Economics at the Indira Gandhi Institute of Development Research (IGIDR).

SHOW NOTES

(00:00) Stories of the Day

(01:00) Why Indian Markets Are Getting Battered Right Now

(03:46) India’s Exports Are Up 26% In August

(05:22) UPI Will Not Be Free Any More, So You Will Have To Pay 0.4% On Transactions Above Rs 2,000.

(08:08) Tata Sons Is Set To Go To Court Against The RBI’s Move Asking It To Go Public, Does It Have A Case?

(16:43) Banks May See Additional Costs For FCNR B Deposits, What Are The Options Ahead?

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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Good morning, it's Wednesday, the 16th of September, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai India's financial capital.

Our top stories and themes…

Why Indian markets are getting battered right now.

India's exports are up 26% in August.

UPI will not be free anymore, why you will have to pay 0.4% on transactions above 2000 rupees when you buy something.

Tata Sands is set to go to court against the Reserve Bank of India's move, asking it to go public. Does it have a case?

And banks may see an additional cost for FCNRB deposits, which brought in more than $127 billion. What are the options ahead?

Markets, Oil, The Rupee and Exports

Is the oil crisis here? Before that, a global bond sell-off once again gained steam this morning with a 10-year US Treasury yield back above 5% after oil prices began rising again. The 10-year yield went as high as 5.033% in early morning trade on Tuesday, according to TradeWeb, the highest level since 2007, as reported in the Wall Street Journal. Elsewhere, Japan's 10-year Treasury yield also hit a new 30-year high, going back above 3%.

The new trigger is the closure of a crucial crude pipeline in Saudi Arabia, which has taken oil prices up again and close to $108 and, of course, drawn world markets back to the prospect of a bleaker few months, if not much more. The other question is, will the Federal Reserve raise interest rates? Rather, will they raise interest rates, despite US President Donald Trump threatening them not to? Investors are now seeing a 92% chance that officials will hike rates by a quarter percentage point, according to CME data quoted by the Wall Street Journal, which is up from 59% a year ago, which also added that the pain now in the markets goes beyond AI trade as US stock futures opened lower on Tuesday and indices in Europe and Asia and, of course, in India are also in the red. Elsewhere, the Wall Street Journal also pointed out that the fuel crisis is feeling more real amongst US oil executives.

Commercial fuel stocks around the world have been depleting for more than six months and strategic crude reserves can't be tapped much further. The shutdown of the pipeline in Saudi Arabia that effectively bypassed the state of Hormuz has removed at least 2.5 million barrels a day from an already tight market, according to analysts. All these mechanisms helped to mitigate the price and supply risk, Chevron CEO Mike Wirth said on Friday at an energy conference in Texas, and he said that those have largely now played out and we don't have nearly the buffers in the system that we did when it began.

He also said in that Wall Street Journal report that I wish I could tell you that I saw some reason why things could ease but it's difficult right now to see that happen. Diesel prices have also hit a record $6.2 a gallon and gasoline prices which had gone below $4 a gallon a month or so ago have rebounded to $4.32 in the United States. With all this in the backdrop, the markets had a particularly volatile day here in India with the Sensex falling almost 1,400 points and closing down 777 points to 74,003 and the Nifty 50 falling 279 points to 23,118.

In the broader markets, the Nifty mid-cap and small cap were also down about 2.1 and 2.4 percent each. The rupee hit its weakest level in more than a month on Tuesday but stayed above 96 rupees a dollar and closed finally at 95 rupees 95 paise which is its biggest one-day fall since mid-July according to Reuters. A weaker rupee has also helped exports though economists have also argued that it's not as much as one should expect or could hope.

Exports jumped 26 percent year-on-year to 43.8 billion dollars for August. Imports rose about 14 percent to about 70.6 billion dollars. India's trade deficit was down to 26.8 billion dollars from 27.2 billion dollars a year ago and 31.9 or close to 32 billion dollars recorded in July according to data from the Department of Commerce.

Overall goods exports are rising cumulatively between April and August. They stood at about 216 billion dollars and up 18 percent year-on-year though imports were also higher by 18 percent in the first five months of the current financial year. And more macro data India's balance of payments recorded a surplus of about 20.8 or 21 billion dollars in July compared to a surplus of 0.3 billion dollars a year earlier thanks to a jump in foreign exchange inflows following the Reserve Bank of India's measures to attract overseas deposits and more on that which is FCA and RB deposits later in the show with Rajeshwari Sengupta.

The current account balance for July 2026 was at a deficit of 7 billion dollars compared to a deficit of 3.2 billion dollars in July 2025. Net transfers which include remittances from Indian workers overseas rose to 13 billion dollars in July from about 12.6 billion dollars a year ago. The capital account which includes foreign portfolio investments saw an inflow of 27.7 billion dollars in July compared to 3.5 billion dollars a year earlier.

Fees on UPI Merchant Transaction

The reigning debate including through the global fintech festival 2026 in Mumbai last week where we were was whether users will have to start paying for UPI transactions when buying things. Now that decision has been taken UPI transactions above 2000 rupees will see a merchant discount rate or MDR of 0.4 percent or the some merchants will have to pay while selling you something. The finalised MDR framework and threshold structure will take effect from 15th of October 2026 which is a month from now.

So the background is this 95 percent or more of transactions between individuals to merchants are actually below rupees 2000 which means there is no cost to it. All person to person UPI transactions which means if I transfer to you it will be free. To give you a sense of scale the month of August saw about 24 billion UPI payments worth about 311 billion dollars.

The national payments corporation of India the nodal body which oversees these payments or UPI payments has argued that the annual government incentive or subsidy while helpful in accelerating early digital adoption was designed as short-term bridge funding rather than a permanent measure to compensate the cost incurred by the payment industry something the core report has also argued in favour of in the past. NPCI says maintaining UPI payment operations serve a bandwidth fraud prevention systems and bank technical support costs about 20,000 crore rupees annually. Now this is something that banks have also been pointing out including to me and many years ago saying that they've invested in core banking solution systems which obviously take a load whenever you do a transaction whether it's a low price transaction or a low cost transaction or a high cost transaction and as you hit the core banking solution systems then obviously you need more server capacity and space apart from everything else that we've just talked about.

So the NPCI I say is transitioning to a commercial threshold based model provides reliable capital for continuous technological innovation for transactions of 75,000 rupees and above the MDR will be capped at 300 rupees per transaction. It's also a structure to be lower than other traditional card based transaction fees. The NPCI standard credit card MDRs are usually between 1.5 to 2.5 percent per transaction debit card MDRs are at about 0.9 percent and capped there and by setting the baseline UPI MDR at 0.4 percent on transactions above 2000 rupees and capping it at 300 rupees for high value purchases UPI remains the most affordable digital payment acceptance tool for commercial enterprises according to the NPCI.

The cost difference also helps merchants lower their payment processing expenses while accepting digital transactions. The international comparison is this the merchant charge in Brazil's PIX ecosystem is around 0.33 percent while in China it's about 0.4 percent.

RBI v Tata Sons

The Reserve Bank of India has preemptively approached the courts seeking to be heard in any matter filed relating to the listing or potential listing of Tata Sons according to Reuters.

Tata Sons is the group holding company for Tata Group and owns stakes in several leading companies in the group. The move follows the Reserve Bank's rejection of Tata Sons application to de-register as a non-bank financial company which obviously pushes the holding company closer to a stock market listing. The Reserve Bank's refusal to exempt Tata Sons from a public listing rule has caught the company and Tata Trusts which own 66 percent of Tata Sons off guard.

The group has been hoping to avoid an IPO for several reasons and Tata Sons representatives had petitioned RBI to remove it from the bucket of systemically important shadow lenders or NBFCs which are mandatorily required to list. Noel Tata, chairman of Tata Trusts would also stand to lose in a listing as the trust would lose the control and power they have right now in Tata Sons and the listing would obviously bring tighter regulatory oversight and investor scrutiny on the group's internal dealings but also offer some of the shareholders including Shapurji, Palunji a potential exit or a part exit. Now there are many workarounds being discussed including shrinking Tata Sons balance sheet to less than the threshold that triggers the mandatory IPO requirement or even splitting Tata Sons into two according to a Bloomberg report.

All of this will be discussed in a meeting on Thursday and some media outlets have speculated that some of the board directors may even pitch that N Chandrasekharan, the current Tata Sons chairman who has indicated that he wants to step down in February may be asked to stay on a question that the court report has also posed in the past. So does Tata Sons have a case on merit if this goes to court? I reached out to Ajay Royti, CEO of tax advisory firm Tax Compaas and I asked him whether there was indeed any hope for Tata Sons to remain unlisted.

INTERVIEW TRANSCRIPT

Ajay Rotti: Let's just take a step back on this one, and why we are in the place that we are in is because Tata Sons is an upper-layer NBFC as per the RBI, and all of those have to list. And that's where the whole issue started—that there's a mandatory listing if you are an upper-layer NBFC, which is a very critical, important NBFC based on size and all of it.

Now what Tata Sons did was to approach RBI to say, "I'll voluntarily surrender my COR," which is a Certificate of Registration. You know, NBFCs are issued CORs by RBI and that's when they become an NBFC, and they said, "I want to voluntarily surrender." And their reason, from what we understand from what's in the public domain, is to say that, "I've repaid all my loans," which they did in 2024.

They became an upper-layer NBFC sometime in '22; therefore, they should have listed by '25, which is a three-year period. In '24, they went themselves and said, "You know, I'm surrendering this because I've repaid all my loans; therefore, I've not borrowed money to invest," which is one of the basic commercial understandings of an NBFC—that either you are lending or you've borrowed and investing. They said, "I've not borrowed to invest, and I've repaid all my loans. What I'm doing right now is a typical holding company, investment company, Core Investment Company, which is my core activity, and therefore I'm not commercially, as you understand, to be an NBFC, and therefore cancel my NBFC registration."

But they are technically, as per the NBFC definition, still an NBFC because they have a lot of financial assets, which is investments. So what I understand now, again based on public documents, is that RBI has responded with a two-three paragraph response to that. That application was kept pending for a while; even the latest RBI disclosure said with the asterisk of all the upper-layer NBFCs, it said, "*Tata Sons' application is under consideration." Now they have rejected it saying, "You know, considering all the facts, you still—we don't accept your surrender, and therefore you comply with all the conditions, which is listing."

Now, can they go to the court and say that, "I should not be treated as an upper-layer NBFC"? I think they will argue that to say that, "I'm not raising public deposits. There's nothing that I'm doing which would constitute a lending or borrowing activity; it is pure investment, and all of my subsidiaries are also listed. Therefore, you direct the RBI to accept my surrender of the certificate of registration." They might as well do that, and that's the only argument in my view that they can advance to say that, "I need to get out of NBFC." Because if they are an upper-layer NBFC, the law is very clear that they have to list, right?

Govindraj Ethiraj: And Reserve Bank has already asked some 15 such companies, including Piramal Finance and others, to list, and they've all done it as well. So would you say that Tata Sons has any legitimate ground here considering this thing, or is it RBI, in a way, being more strict than necessary?

Ajay Rotti: I think RBI is just enforcing the law as it stands, which is to say: if you're an upper-layer NBFC, you are to list.

What makes it complex is the Tatas' holding structure, because Tata Sons is predominantly held by, you know, charitable trusts and philanthropies—more than almost close to 60 percent—and the rest is with the Shapoorji family, and some are with other Tata Group companies. If you see what has happened to Tata Chemicals, which is on the upper circuit, it is because Tata Chemicals holds 2.5 percent in Tata Sons. So a lot of Tata companies hold, and the family holds some really minuscule percentage.

Now, with more than two-thirds of the holding—or close to two-thirds of the holding—being with charitable trusts, then, you know, in terms of disclosures, what you need to do once you are listed, shareholder approvals for further investments, etc., becomes a little complex. If you apply the law as it stands today, maybe it becomes a little difficult and messy for the Tatas and the structure. There is no carve-out in the RBI legislation in terms of an upper-layer NBFC with specific patterns to be exempted from it. So I wouldn't say RBI is being sort of more strict or whatever; that's the law. And if they don't want Tata Sons to get listed because of these specific facts, it's more of a policy decision rather than reading of the law, in my view.

Govindraj Ethiraj: Right. And if you were to look at, let's say, cases where either the Reserve Bank or maybe even SEBI has intervened in such situations or similar situations, what do courts usually do? I mean, to what point do they also try and adjudicate, or do they bounce it back? And this is a very general-sense question.

Ajay Rotti: Courts will look at the law and say what needs to be done; they won't get into, you know, policy issues to say you need to do it.

The courts, at most, can say, "You know, consider their surrender of Certificate of Registration in light of these facts and reconsider the application." If the RBI says, "Okay, I accept your surrender of COR," then everything follows because then you are not an NBFC, you don't need to list.

Courts, I don't think, can say that whether they have to list or not list. They can only say how RBI has to consider this application. They can probably adjudicate on whether RBI has considered the surrender request in all fairness or not. Courts cannot get into, you know, the policy—what has to be followed; they can only see whether the law has been fairly applied in this case or not.

But, you know, there's no ground for a court to come in to say that this is what they were eligible for and you denied it; it's an executive policy matter. The court may likely say that, "Reconsider it," and they may send it back if there are some facts. I don't know if they will be able to grant an exemption from listing; that may not be possible.

Govindraj Ethiraj: Right. And finally, I mean, could this also then, for example, be in injunction mode, which could also in a way solve some of the problems—some of the problems that maybe Tata Sons has right now?

Ajay Rotti: Yeah. So there are multiple other aspects and moving pieces here, and most of it is linked to this whole thing on whether they need to go in for a mandatory listing or not.

There's also this piece that the Shapoorji Pallonji family has been wanting to monetise some of this—everybody knows this. So therefore, what happens if this entity is listed and then the shares are technically freely tradable? Now, none of the Tata Trusts will be able to sell, you know. They are holding it for a particular purpose; it's not that they can sell those shares and do anything. The Tata companies selling it will have their own, you know, board decisions; the boards are, again, Tata Sons-controlled boards in a lot of cases.

So it does become a little messy in terms of what it does to solving the other problems around the issue. But again, you know, interesting space. We'll have to see what happens in the court.

I personally was almost convinced that this would end up in the courts. What has surprised me is the fact that RBI has filed a caveat here, which, just the way I look at it, is to say that RBI is also ready to defend its decision. That Tatas would go to the court was known, but what happens there now is what we will have to see. At least the RBI reconsidering it without the courts intervening is almost ruled out—the fact that they have filed the caveat.

Govindraj Ethiraj: Right, Ajay. Thank you so much for joining me.

Ajay Rotti: Thank you, Govind.

FCNR B Deposits

Costs on foreign currency non-resident deposits are likely to rise by 15 to 20 basis points for Indian banks over and above the interest costs committed to depositors as banks have to separately hedge the dollar liability arising from interest payments on these deposits according to bankers who spoke to business standard.

The cost of managing this exposure depends on currency forward premiums and interest rate differentials between the two currencies. The reserve bank is absorbing the hedging costs on the principal amount but not on the interest payable. The central bank had clarified in an FAQ released in June that it would provide a forex swap for the deposits received.

Banks have mobilised as we've been saying about $127 billion through FCNRB deposits under the concessional swap window introduced to attract those dollar deposits and it was closed on August 31st, a month before the reserve bank had originally scheduled. A senior banker at a state-owned bank told business standard that banks will have to bear the hedging costs on the interest component themselves and that's why while some banks were very aggressive they did not go beyond a point and did not pursue additional deposits. Now the debate of course continues.

I spoke with Rajeshwari Sengupta, associate professor of economics at the Indira Gandhi Institute of Development Research or IGIDR in Mumbai and I began by asking her how she was seeing the cost of FCNR deposits at this point and what could be the potential moves or path ahead for the reserve bank of India now that the deposits are in.

INTERVIEW TRANSCRIPT

Rajeswari Sengupta: So this is a very, very important topic, and I know there's a lot of noise happening, a lot of celebration that FCNR scheme has brought in a huge amount of dollars, which has showed up RBI's foreign exchange reserves, which have gone to around $740 billion. So the way I look at it is my first question to ask is why was this necessary to begin with? The answer is presumably RBI needed to accumulate more reserves so that they had greater ammunition to manage the rupee volatility.

But then I will come back and ask that at a time when the scheme was announced around June 5th, 2026, RBI already had about $680 billion reserves. So, you know, it's not like RBI was running out of reserves and it had fallen to such low levels. For example, you know, in 1991, we did an India development bond.

That was the first time we tried to get money from the NRIs. Back then, we really did not have reserves. So there was a need for getting NRI money.

Now we are not even nearly close to running out of reserves. So I don't understand what was the pressing need to do that. Secondly, if $730 billion is all that they needed, you know, there is no optimal amount of reserve holding.

So what is saying that $680 billion was not enough and $740 billion is enough? Is there a psychological level? Economists don't understand that because we don't think in those terms.

So therefore, if at all the objective was to show up reserves, then why do you withdraw the scheme prematurely? You know, just keep going and keep getting more and more and you maybe go up to $800 billion. So if reserve accumulation to manage the rupee was the objective, then premature withdrawal of the scheme doesn't make any sense.

And I don't even understand why it was necessary at this point of time. Now, given that they did it, and given that I think they have a buyer's remorse now, because they got so much of money that they did not anticipate, more than $140 whatever billion that came in. The problem now is, A, this is something that many people are talking about.

And I agree that this also means that the surplus rupee liquidity in the banking system today is more than 11 lakh crore. And that is a massive amount of surplus that the banks are dealing with, which is a big problem because A, as you know, our inflation is already increasing. It's more than 4% and RBI's forecast is going to cross 5%.

So at a time when your inflation is already increasing, if your money supply goes up by so much, that further aggravates inflationary pressure. So in a way, it's a little bit counter to RBI's inflation targeting objective, because now RBI will have to do a lot of effort to mop up this liquidity before they can consider any kind of repo rate hike, either in October or in December. Now, mopping up this liquidity is costly, because they are trying some VRRR operations, which are very short term, either a 3-day or a 30-day.

And most of the VRRR auctions that they have announced have not been successful because banks don't want to return the money. They don't want to lock up the liquidity for 30 days. They now need the flexibility to lend it out whenever they can, because banks are also having a deposit growth slowdown.

So this is sort of helping their deposits. So they want to let it out. So that mop up strategy is not working.

So then the only thing RBI can do, which is what economists call a sterilisation, is that RBI basically issue government bonds and you mop up the surplus rupee liquidity. But that means that the government has to pay interest rate on these bonds. The sterilisation cost can be pretty big, because five-year government bond yields are more than 6.5%, three-year yields are more than 6%, average maturity of these deposits are three to five years. So any cost that the government pays on these government bonds is going to be costly for them. Now somebody can say, so what, RBI can use this money to buy US treasuries. And US treasury yield today is almost close to 5%.

So you're going to earn some return out of it. But then if you're paying a sterilisation cost of 6.5% or more on government securities here, and you're only earning 4.5% to 4.9%, there is a net cost you're still paying out on a very big amount of money. So any sterilisation that the RBI will be forced to do now is going to be a cost on the fiscal, on the budget.

So that's one cost and I'm happy to talk about some other very serious cost of the scheme.

Govindraj Ethiraj: Right, okay. So I'll come back to that in a second. But if you were to look back at the scheme, and why it was announced, so how would you answer the question that you posed as to what was the real need to even float the scheme?

Rajeswari Sengupta: Correct. So as I said, if shoring up reserve was the main concern, I really don't think that this cuts it because RBI was not really running so low on reserves. They do have a very big net dollar short forward book, which is also about $135 billion or so, maybe even more.

So it is possible that they needed this dollar inflow now to help them settle the forward book to some extent, which again goes back to the same logic of using dollar reserves to settle forward positions, which will further help them to manage the rupee. So maybe that was one argument. But I think what fundamentally people like us understood is they are doing it in order to buy time, that the rupee was depreciating steadily by close to 5-6%.

Foreign investors, as you know, are taking out more than $20-25 billion from the equity market. This was a buying time strategy for about three months, during which some kind of measures or reforms or initiatives would have been announced to further encourage foreign investors to come in and put money into the market. But the problem is, I don't see any such structural measures that were taken in this three months period in order to attract either foreign direct investment or foreign portfolio investment.

So the buying time argument, which is what I thought was the reason for doing this, doesn't really work because in the end, all that happened was they floated the scheme, the money came in, and now they have a buyer's remorse and they're struggling to mop up the liquidity. They didn't really use the interim period for doing any kind of structural measures to make the balance of payment situation better or get more foreign investment. So that didn't happen.

So again, at this point, I am actually at a loss to understand why they did this.

Govindraj Ethiraj: And you're saying this because you're not seeing the subsequent moves, including what you just pointed out. So you're saying that even if it was thought of, it was not thought through?

Rajeswari Sengupta: Yeah, I mean, first of all, I don't know whether it was thought of because the objective of the scheme was not made very clear and transparent. Second of all, even if they said that, you know, we are doing this scheme to get dollars in order to help manage the rupee. Sure, temporarily, you stopped the rupee depreciation, but now the rupee is back to falling again because oil prices have gone beyond $100 a barrel.

It will keep getting worse and the rupee will keep depreciating. So what really happened in this three-month period by temporarily stopping a depreciation for just three months, then effectively, RBI has actually taken a very big bet. And the cost to the RBI, it's not just on the budget for sterilisation, and I'm happy to talk about the cost to RBI, it has basically taken a very big bet in the future.

So in my mind, the cost of the scheme is much greater than the benefit, because the benefit being just a temporary three-month period of stopping depreciation, which is inevitable, it's already started again. And RBI just has a few billion dollars more reserves to stop it, which is also start going to get eroded because they're already actively intervening. So I don't really see a long term or medium term benefit of Right.

Govindraj Ethiraj: So let's say maybe the expectation was that the war in West Asia will cool off. And surely no one expected oil to go back to over $105 per barrel. And that has put additional pressure.

So let's say it's a bet gone wrong. So two quick questions. So one is, you said there are other problems that this has triggered.

One second is, now that we've got the money here, what's the best way to resolve this problem?

Rajeswari Sengupta: So before I come to these two questions, Gopi, one thing is also important to remember, and I talked about this in my earlier episode with you, that the rupee depreciation is not just a function of the war. There is an underlying pressure on the rupee to depreciate now, because foreign investors don't seem to be that interested in India. The growth prospects of the Indian economy do not seem lucrative enough to attract foreign investors on a sustainable basis.

So financing even a less than 1% of GDP current account deficit is proving to be a bit of a struggle for us, irrespective of the war. So even if the RBI thought the war was going to end, even then this move is not justified, because the rupee was going to keep depreciating. Now, on to the cost of RBI.

See, what the RBI has done is, let's say today, whatever dollars have come in, RBI has taken the dollars entirely and given rupees to the banks so that they can lend it out. So assuming an exchange rate of, let's say, 93, 94. So for every dollar that the RBI has gotten, the RBI has given 94 rupees to the banks.

And this is what the banks are now lending out. That's the surplus rupee liquidity. Now, the idea is 3 years later, 5 years later, when these deposits mature, RBI will have to do the exact swap.

So RBI will then have to take 94 rupees back from the banks and give them back 1 dollar. This is great. It can work perfectly well if the rupee between now and then, now and 5 years later, remains exactly at 94.

But you and I both know that that's not going to happen. Assuming the rupee depreciates to 100, now imagine what the RBI is doing. 5 years later, the RBI is giving 1 dollar back and getting only 94 rupees when that 1 dollar is actually worth 100 rupees.

So the RBI is taking a very big loss of 6 rupees for every dollar that is given back on a very big amount of more than 130-140 billion dollars. So that is a cost that RBI has postponed and kicked the can down the road, which will be something that they have to incur when the deposits mature and the cost will depend upon the extent of the rupee depreciation.

Govindraj Ethiraj: But there is also the chance that the rupee would appreciate, isn't it?

Rajeswari Sengupta: I don't think between now and the next 3-4 years or 3-5 years, unless something very structural changes in the Indian economy, in terms of massive growth engines of exports, investment, AI, FDI etc happening, I don't really think the rupee is going to appreciate between now and then. Because the global economy is quite unfavourable and so far, there is not a lot of substantial interest of foreign investors to put in a lot of money into India for the rupee to appreciate. If it does, then that's great.

But if it doesn't, then the RBI has taken a very big bet on the future. And also, mind you, what's going on is, and this is a very interesting point, you are essentially transferring resources from the government to very rich people. Because these are ultra high net worth individuals who are able to take the leverage and they are getting more than 10-13% interested on this.

But the cost is being borne by the government on its budget.

Govindraj Ethiraj: How is it 10-13%?

Rajeswari Sengupta: So, let's say you keep a deposit of $100 and you get a 6% interest rate on it, right? That's the PNV. But then you're a very, very rich individual, you can actually leverage this, which means that you can take this $100 and against this, let's say you are depositing an ICICI bank, then against this HSBC is going to give you a loan of $900 and let's say 5.5%. Then you can take this loan and again deposit at 6%. So, by that you can just end up getting more than 10% of returns. So, it's a leverage that basically becomes so attractive, which is why all the money has come in.

Govindraj Ethiraj: And a good part of it is through the leverage route.

Rajeswari Sengupta: Exactly. I think most of it is through the leverage route. But that means you're transferring resources from the government to the rich people balance sheets.

Govindraj Ethiraj: Okay. So, when you say transferring from the government to rich people, I mean, one of the arguments really is that it's the banks who would pick up the bill. So, why is it the government that is picking up the bill?

Rajeswari Sengupta: Because when you do sterilisation of 11 lakh crore using government security, the government has to pay interest on that. That means that is a fiscal cost being borne by the government. And B, when the RBI has to do, eventually when you have to return all the money, and if the rupee depreciates, as I just explained, RBI will have to bear the cost, this will impinge on the amount of dividend the RBI can pay the government, which is another fiscal cost for the government, which means both fiscal cost means that government has that much less revenue to spend on the common people, so to speak. So, it is a transfer of resources from government to the rich people balance sheets.

Govindraj Ethiraj: Got it. So, now that all of this is here, what's the way out from your vantage point?

Rajeswari Sengupta: Well, as I said, there's a buyer's remorse, RBI will have to figure out a way to mop up this entire liquidity before they can consider potentially a repo rate hike to deal with inflation. And then once the sterilisation has happened, the government will have to bear the cost. Eventually, we can only hope the rupee will appreciate.

Also, remember what this does, Govind, is this also messes up with RBI's incentive of preventing the rupee from depreciating. Because if the rupee keeps falling over the next two to three years, RBI's cost goes up more and more because of the mechanism that I described. So, in a very weird way, it is in the central bank's interest now to not let the rupee depreciate.

Otherwise, they will incur a loss and they will be able to pay less dividend to the government. And that's not a right thing at all, because the central bank should not have any skin in the game when it comes to managing the currency. But that is exactly what has happened.

So, now what happens going forward is this cycle will have to be put in force. I mean, you mop up liquidity and you just hope the rupee doesn't depreciate. Or you will do everything in your power to ensure the rupee doesn't depreciate, because otherwise you're going to incur a loss.

But fundamentally, I would have hoped the government or RBI would have taken this time to announce more structural measures to strengthen the balance of payments of the economy. And that is something that still needs to be done. These kind of temporary band-aids will not really work for a very long time.

Govindraj Ethiraj: Got it. Rajeswari, thank you so much for joining me.

Rajeswari Sengupta: Thank you so much.