Wednesday, September 4, 2013

Report on management of forex reserves: RBI





(Focuses on bringing more transparency & enhancing the level of disclosure)

(The Half-yearly report on management of foreign exchange reserves released by Reserve Bank of India briefs about the developments regarding movement of reserves and information on the external liabilities vis-à-vis the foreign exchange reserves, prepayment/repayment of external debt, Financial Transaction Plan (FTP) of the IMF, adequacy of reserves, etc. during the period of Oct 2012 to Mar 2013)


Highlights of the half-yearly report on management of foreign exchange reserves by RBI

Foreign exchange reserves – The reserves stood at USD 294.8 billion as at end-Sep 2012. During the half year under review, it scaled down to USD 290.9 billion at the end of Feb 2013 and further increased to USD 292.0 billion at the end-Mar 2013. Although both US dollar and Euro are intervention currencies and the Foreign Currency Assets (FCA) are maintained in major currencies like US dollar, Euro, Pound Sterling, Japanese Yen etc., the foreign exchange reserves are denominated and expressed in US dollar only. Movements in the FCA occur mainly on account of purchases and sales of foreign exchange by the RBI in the foreign exchange market in India , income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government and the effects of revaluation of the assets.

Foreign exchange reserves                                                                                         (US$ Mn)
Source: Reserve Bank of India

Forward liability – The net forward liability of the Reserve Bank in domestic foreign exchange market stood at USD 11,006 million as at the end of March 2013.

External liabilities vis-à-vis foreign exchange reserves – The net India ’s International Investment Position (IIP) as at end-March 2013 stood at (-) USD 307.3 billion, implying that our external liabilities are more than the external assets. The net IIP as at end-March 2012 and end-September 2012 was USD (-) 249.5 billion and USD (-) 270.3 billion respectively.

Adequacy of Reserves – Adequacy of reserves has emerged as an important parameter in gauging the ability to absorb external shocks. With the changing profile of capital flows, the traditional approach of assessing reserve adequacy in terms of import cover has been broadened to include a number of parameters which take into account the size, composition and risk profiles of various types of capital flows as well as the types of external shocks to which the economy is vulnerable. The ratio of short-term debt to the foreign exchange reserves, which was 28.7% at end-September 2012, increased to 33.1% at end-March 2013. The ratio of volatile capital flows (defined to include cumulative portfolio inflows and short-term debt) to the reserves increased from 83.9% as at end- September 2012 to 96.1% as at end-March 2013. At end-March 2013, the import cover has declined marginally to 7 months from 7.2 months at end-September 2012.

Management of Gold Reserves – The Reserve Bank held 557.75 tonnes of gold forming about 9% of the total foreign exchange reserves in value terms as on March 29, 2013. Out of which, 265.49 tonnes are held abroad in safe custody with the Bank of England (BoE) and the Bank for International Settlements (BIS).

Investment Pattern and Earnings of the Foreign Currency Assets – The foreign currency assets are invested in multi-currency, multi-asset portfolios as per the existing norms, which are similar to the best international practices followed in this regard. As at end-March 2013, out of the total foreign currency assets of USD 259.7 billion, USD 152.5 billion was invested in securities, USD 101.7 billion was deposited with other central banks, BIS and the IMF and remaining USD 5.5 billion comprised deposits with foreign commercial banks and funds placed with the External Asset Managers (EAMs). The rate of earnings on foreign currency assets and gold decreased from 1.74% in July 2010 – June 2011 to 1.47% in July 2011 – June 2012 reflecting the generally low global interest rate environment.

While liquidity and safety constitute the twin objectives of reserve management in India , return optimisation becomes an embedded strategy within this framework. The Reserve Bank of India Act, 1934 provides the overarching legal framework for deployment of reserves in different foreign currency assets (FCA) and gold within the broad parameters of currencies, instruments, issuers and counterparties. The law permits broad investment categories such as deposits with other central banks and the Bank for International Settlements (BIS), deposits with foreign commercial banks, debt instruments representing sovereign/sovereign-guaranteed liability with residual maturity for the debt papers not exceeding 10 years, other instruments / institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act and dealing in certain types of derivatives. While, the risk management functions are aimed at ensuring development of sound governance structure in line with the best international practices, improved accountability, a culture of risk awareness across all operations, efficient allocation of resources and development of in-house skills and expertise. The strategy for reserves management places emphasis on managing and controlling the exposure to financial and operational risks associated with deployment of reserves.


Warm regards,

Dr. S P Sharma
Chief Economis

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