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RBI panel to firm up mechanism for assessing adequacy of forex reserves

An internal group of the Reserve Bank of India is expected to study how much reserves are adequate to cover various risks.

Written by Sunny Verma | New Delhi |
September 10, 2019 3:31:42 am
Reserve Bank of India, RBI Bimal jalan committee, Bimal jalan panel report, RBI foreign reserve, Reserve Bank of India forex reserve, forex reserve India The Bimal Jalan Committee on Economic Capital Framework, in its report last month, noted that the RBI’s forex reserves in 2008 were higher than country’s external debt, a position which has reversed in 2019.

After adopting a fresh Economic Capital Framework, the Reserve Bank of India (RBI) is working on putting in place a formal mechanism to assess the adequacy of its foreign exchange, or forex, reserves. This is important as India’s external liabilities have been higher than its forex reserves in recent years.

An internal group of RBI is working on developing a framework to assess whether forex reserves are adequate. The panel is expected to study how much reserves are adequate to cover various risks.

The Bimal Jalan Committee on Economic Capital Framework, in its report last month, noted that the RBI’s forex reserves in 2008 were higher than country’s external debt, a position which has reversed in 2019.

The year 2008 was tumultuous year as global financial services firm Lehman Brothers’ went bankrupt that year, resulting in the financial crisis that also gripped India.

“At present, the foreign exchange reserves (more than $400 billion) are significantly lower than the country’s total external liabilities ($1 trillion) and even lower than total external debt ($500 billion). This position is in contrast to that in 2008 when India’s foreign exchange reserves, at $310 billion, exceeded the then total external debt of about US$224 billion and provided a much larger coverage of total external liabilities that amounted to about $426 billion,” the Jalan Committee noted in its report.

“This needs to be taken into account in assessing the external risk being faced by the country and the possibility that the RBI may be required to increase the size of its forex reserves with its concomitant implications for the balance sheet, risks and desired economic capital. This is especially important given that the RBI’s public policy objectives of maintaining external stability during a crisis would have to be pursued irrespective of the adequacy of its risk buffers,” it added.

While the Jalan panel argued that the RBI should maintain a forward-looking view on the adequacy of its risk buffers even during normal times, it noted that the central bank in consultation with the government periodically reviews the adequacy of the country’s forex reserves.

“Further, a separate internal group of the RBI is looking into the question of developing a formal framework to assess the adequacy of the forex reserves,” the report said.

Safety and liquidity are currently the twin objectives of reserve management by the RBI in India, while return optimisation is also kept into mind. Foreign currency assets, gold, special drawing rights and reserve tranche position in the International Monetary Fund are the main components of India’s forex reserves.

India’s forex reserves at $412.9 billion on March 31, 2019 were equivalent to 9.6 months of imports. The RBI conducted buy/ sell swap auctions of $5 billion, for a tenor of three years in March, and a similar swap auction in April, which led to increase in forex reserves in 2019-20 so far. As on August 16, 2019, India’s forex reserves were at $430.5 billion — an increase of $17.6 billion over end-March 2019.

The Reserve Bank’s examination of the adequacy of forex reserves comes at a time when the Finance Ministry has announced plans to borrow a portion of its annual borrowings in international markets through issuance of sovereign bonds overseas. The Centre is expect to raise around $10 billion from overseas markets through foreign currency bonds, on which it will have to bear currency risk.

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