MUMBAI: The central bank appears to have carried out changes to its
forex reserve management strategy by pulling out substantial funds
parked with many high-street banks. The shift may have been prompted
by the recent developments in the global financial markets.
New data available with the Reserve Bank of India pertaining to the
period between March 2007 and March 2008 shows that although forex
reserves rose by more than 50% during this period, the deposits parked
by the central bank with foreign banks around the world dipped from
$46.7 billion in March 2007 to $6 billion in March 2008.
These funds are now being placed with other central banks and
mutlilateral agencies where the returns are reckoned to be relatively
low. India's foreign exchange reserves aggregated $309 billion at the
end of March 2008. It has swelled to $313 billion in April-end, making
India the sixth-largest custodian of forex reserves in the world.
This dip has been particularly steep since July 2007, which coincides
with the turmoil in credit markets in the West. This was the period
during which the US subprime crisis snowballed, impacting the global
financial markets.
Top-rated global banking majors have taken a major hit during the past
few quarters on account of their investment in mortgage securities.
This may also have influenced the RBI's decision to change gears in
the near term and berth in safer shores. The move may have an impact
on the RBI's income from overseas investments.
Over the past few years, income from foreign sources have accounted
for more than 75% of the central bank's total income. But, RBI has
always maintained that its primary aim when it comes to foreign
exchange reserves management was to ensure safety and liquidity, with
higher returns figuring lower in the hierarchy of preferences on this
issue.
RBI's parking of reserves is consistent with the best practices laid
down for central banks by the International Monetary Fund (IMF). This
includes parking part of the reserves as cash deposits with foreign
central banks and multilateral agencies such as IMF and the Bank for
International Settlements (BIS).
It also invests in the deposits of foreign commercial banks and bonds,
generally the highest-rated sovereign bonds of leading economies and
occasionally in top rated corporate bonds. India's foreign exchange
reserves are spread across a variety of currencies including the
dollar, euro and yen.
But, the precise currency composition of reserves is generally not
released by most countries including India, going by global practice.
According to RBI, this is because short-term variations in reserves
held in different currencies by central banks are regarded as being
market sensitive.
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