The global financial turmoil and the fall in interest rates seem to have hit the return on India’s foreign exchange reserves. As per the Reserve Bank of India (RBI) estimates, the rate of earnings on $264 billion worth foreign currency assets and gold, after accounting for depreciation, fell from 4.82 per cent in the July 2007-June 2008 period to 4.16 per cent in the July 2008-June 2009 period. This means a fall in interest income of at least $1.75 billion during the period — when global central banks announced stimulus measures and flooded the market with liquidity.
The RBI also admitted that valuation gain on account of the fall in the value of the US dollar against major currencies contributed maximum to the forex reserves. The valuation gain of $19.7 billion contributed as much as 67 per cent of the increase in the forex reserves during the period. Interest rates in many countries — like the US, the UK, Eurozone, and Japan — had plunged in the last one year. Yields of 10-year US Treasury securities dipped below 2.2 per cent. In India, the deployment of forex reserves is handled by the RBI directly. On the other hand, China which has a forex kitty of $2,400 billion has floated a separate company to manage its forex reserves. With a registered capital of $200 billion, China Investment Co Ltd, decides the investment avenues to get better returns. Though there were moves to float a sovereign wealth fund and another proposal to utilise forex reserves for infrastructure development, they remained only on paper.
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,” the RBI said in its latest half-yearly report on forex reserves. As at end-September 2009, out of the total foreign currency assets of $264.4 billion, $148.0 billion was invested in securities, $111.3 billion was deposited with other central banks, BIS and the IMF and $5.1 billion was in the form of deposits with foreign commercial banks and funds placed with the External Asset Managers (EAMs).
On balance of payments basis (that is, excluding valuation effects), the foreign exchange reserves increased by $9,533 million during April-September 2009 as against a decline of $2,499 million during April-September 2008. The valuation gain, reflecting the depreciation of the US dollar against the major currencies, accounted for $19.76 billion (67.5 per cent of the total increase in foreign exchange reserves) during April-September 2009 as compared with a valuation loss of $20,88 billion during April-September 2008. Besides the valuation gain, inflows under foreign investments and non-resident Indian deposits and SDR allocations by the IMF have contributed to the increase in foreign exchange reserves during April-September 2009, the RBI said.
Source : Indianexpress.com