With the rate of returns on the country’s foreign exchange reserves declining, the Reserve Bank of India (RBI) and the government are exploring ways to enhance returns and have sought external expert assistance for better deployment of forex.
“There have been a number of discussions on how to better deploy forex reserves. Investing them in gilt securities of countries other than the US, as well as, in AAA-rated corporate bonds of top-notch companies are among the options that have been discussed. Now the expert agencies have been appointed and they will help the central bank in devising a strategy on this subject,” a government official familiar with the discussions said. The RBI has in the past used a portion of the forex reserves to fund infrastructure projects in the country, while there has also been suggestion that these can be deployed to capitalise public sector banks.
Last month, the RBI and the finance ministry held discussions on the issue of better management of forex reserves. The RBI’s Department of External Investments and Operations (DEIO) invests forex keeping in mind the objectives of safety, liquidity and return, in that order, as part of its management of foreign exchange reserves.
As many countries, including the US and the Euro zone, slashed interest rates, the rate of earnings on foreign currency assets declined to 2.10 per cent in 2020-21 as compared with 2.65 per cent in 2019-20 and 2.79 per cent in 2018-19, as per the RBI data. Earnings from foreign currency assets declined by Rs 1,652 crore to Rs 80,715 crore during the year ended March 2021from Rs 82,367 crore in the previous year.
When contacted, the RBI and the Finance Ministry did not comment on the development.
In its latest annual report released in May this year, the RBI acknowledged that the “low yield environment makes it an arduous task for asset managers in general and reserve managers in particular, to generate reasonable returns from their portfolios given their risk appetite.”
Falling rates globally over the years have made investment in gilts of developed countries unattractive, even as there are limits of how much portion of reserves can be invested in gold. The 10-year US bond yields, for instance, have fallen from the high of 15.8 per cent in 1981 to below 1 per cent in 2020, while many advanced economies like the Euro zone, Japan and Switzerland have had negative policy rates and sovereign bond yields for years now, the RBI noted.
The central bank said it will explore new asset classes and new markets for deployment of foreign currency assets for portfolio diversification and in the process tap advice from external experts. Sources said as part of its discussions with the finance ministry over management of forex reserves, an idea of investing a portion of it in gilts of some Asian countries was also discussed.
In the past, the RBI has agreed to invest a total of $5 billion of its forex in the UK subsidiary of India Infrastructure Finance Company, which was ring-fenced in such a manner that the forex does not flow back into India and is spent by companies for buying equipment abroad.
The RBI reduced its holdings in foreign securities by over $ 10 billion to $ 359.87 billion by March 2021 from September 2020. However, it increased its deposits in other central banks by $ 9 billion to $ 153.38 billion and deposits in foreign commercial banks from $ 7.4 billion in September 2020 to $23.4 billion by March 2021.
The Reserve Bank is sensitive to the credit risk it faces on account of the investment of foreign exchange reserves in the international markets. The Reserve Bank’s investments in bonds/treasury bills represent debt obligations of highly rated sovereigns, central banks and supranational entities. Further, deposits are placed with central banks, the BIS and commercial banks overseas. RBI has framed requisite guidelines for selection of issuers/ counterparties with a view to enhancing the safety and liquidity aspects of the reserves.
Meanwhile, the country’s forex reserves swelled by $1.013 billion to touch a new high of $610.012 billion in the week ended July 2. In the week ended June 25, the reserves had risen $5.066 billion to $608.999 billion.
During the reporting week, the rise in the kitty was mainly on account of a gain in foreign currency assets (FCA). FCAs rose $748 million to $566.988 billion, as per data by the RBI. Gold reserves climbed $76 million to $36.372 billion in the reporting week.
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