the central bank earns on its liquid assets.

“The Reserve Bank of India (RBI) could well do to maintain an adequate level of reserves in the form of low return but highly liquid assets for meeting its needs like current account financing, meeting short term external debt obligations, restraining excessive volatility in the exchange rate etc., and park the excess reserves in an account with an objective of maximising returns subject to acceptable risks,” Sen Gupta’s study points out.

The funds in such an account could be profitably invested in non-treasury based assets like equities, private equity company and real estate, which are associated with greater market risk and hence correspondingly higher returns.

The bulk of India’s reserves are held in the form of securities or deposits with foreign commercial banks and international organisations. However, the rate of earning on foreign currency assets and gold, after accounting for depreciation was only 4.6 per cent in 2006-07 and 3.9 per cent in 2005-06. The inflation rate during these two years was around 5.43 per cent and 4.38 per cent, implying a real rate of return of -0.82 per cent in 2006-07 and -0.48 per cent in 2005-06.

The low returns are due to the RBI’s cautious policies, which are guided by principles such as maintaining mark-to-market value and liquidity by taking minimal credit and market risk. The RBI limits itself to investing in short dated AAA-rated government debt securities. “Such low returns have raised several questions about the management of international reserves by the RBI,” the report said.

... contd.