The Reserve Bank of India (RBI) earned a return of 0.80 per cent return — the lowest in the last 15 years — on its huge foreign currency assets of Rs 23,68,683 crore invested in various securities, other central banks and commercial banks abroad during the 12-month period ended June 2017. The income from foreign sources fell by 35.27 per cent from Rs 28,713 crore in 2015-16 to Rs 18,586 crore in 2016-17 mainly on account of the appreciation of the rupee and reduced premium income on the swaps that are in the nature of repo, the RBI said in its Annual Report for 2016-17.
“The rate of earnings on foreign currency assets was lower at 0.80 per cent in 2016-17 as compared with 1.29 per cent in 2015-16,” it said. Foreign currency assets rose from Rs 23,06,376 crore in June 2016 to Rs 23,68,683 crore in June 2017, a rise of Rs 62,307 crore or 2.70 per cent.
In fact, return on foreign currency assets has been declining progressively because of the sharp fall in interest rates across the world after the financial crisis. The rate of earnings on foreign currency assets and gold, after accounting for depreciation, was 4.82 per cent in July 2007-June 2008 period. The rate decreased to 4.16 per cent in July 2008-June 2009 and then slumped to 2.09 in July 2009 to June 2010 reflecting the generally low global interest rate environment. Currently, almost 66 per cent is invested in securities abroad, 27 per cent as deposits with other central banks, BIS and IMF and over six percent deposits with the overseas branches of commercial banks.
The highest return in the last 15 years was 4.82 per cent in the 12 months ended June 2008.
During the UPA government regime, Planning Commission deputy chairman Montek Singh Ahluwalia had proposed using the country’s forex reserves for financing infrastructure development. Opposing the idea, the RBI contended that if reserves were used to fund infrastructure then the amount available as reserves would be reduced, compromising considerations of safety and liquidity. The RBI’s stand ultimately proved correct as a major chunk of the infrastructure loans became non-performing assets (NPAs) in subsequent years.
According to the RBI, the major sources of market risk for central banks are currency risk, interest rate risk and movement in gold prices. Gains/losses on valuation of foreign currency assets and gold due to movements in the exchange rates and/or price of gold are booked under a balance sheet head named the Currency and Gold Revaluation Account (CGRA). The balances in CGRA provide a buffer against exchange rate/gold price fluctuations which in recent times have shown sharp volatility. Foreign dated securities are valued at market prices prevailing on the last business day of each month and the appreciation/depreciation is transferred to the Investment Revaluation Account (IRA). The balance in IRA is meant to provide cushion against changes in the security prices over the holding period.
The RBI holds 557.77 metric tonnes of gold, of which 292.28 metric tonnes is held as backing for notes issued and shown separately as an asset of Issue Department. The balance 265.49 metric tonnes is treated as an asset of Banking Department. The value of gold held as asset of Banking Department decreased by 5.32 per cent from Rs 66,223 crore as on June 30, 2016 to Rs 62,702 crore as on June 30, 2017 primarily on account of decline in international gold prices and appreciation of the rupee against the dollar, the Annual Report said.
The accretion to forex reserves during the entire reform period from 1991 has been facilitated by an increase in net foreign direct investment and foreign portfolio investment in the capital market, which was thrown open during the 1991-1993 period.