Global hurly burly makes RBI pull $29 billion out of foreign banks

Mumbai, July 18: When it comes to deployment of foreign exchange reserves, the Reserve Bank of India (RBI) seems to trust other central banks and securities more than foreign commercial banks. At a time when the global financial markets and banking sector were undergoing a turmoil, the RBI pulled out around $29 billion of its foreign currency assets from foreign banks and external asset managers in the six-month period ended March 2008 and redeployed it elsewhere.

As per figures available with the RBI, its investments in foreign commercial banks and asset managers dipped to $ 6.01 billion as on March 31, 2008 from $ 35.39 billion on September 30, 2007. Though the RBI has not attributed any reason for the withdrawals, analysts said it could be due to the global turmoil in the financial sector. “Many foreign financial firms were hit by the subprime crisis and the subsequent credit market turmoil. RBI’s fund managers might have thought it prudent to redeploy the forex reserves instead of putting it in foreign banks,” said a source.

The returns on the RBI’s forex investment are hardly anything to cheer about. It says that during the year 2006-07 (July-June), the return on foreign currency assets and gold, after accounting for depreciation, increased to 4.6 per cent from 3.9 per cent during 2005-06. This is not even half of the current Inflation rate of 11.91 per cent. It's unlikely that the return has gone up significantly after June 2007. If the inflation factor is taken into account, the RBI is making a loss on its forex deployment.

On the other hand, the RBI is yet to take a view on establishing a sovereign wealth fund (SWF) that can fetch better returns using forex reserves. RBI understandably lays a greater emphasis on safety and liquidity.

Though the central bank recently said it was possible to make a case for an Indian SWF, it would be very difficult to reckon in the Indian context “as is the case with many other countries, the ‘reserve adequacy’ in a dynamic setting and on that basis divert a part of ‘excess’ reserves for a higher return from riskier assets”.

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