The Reserve Bank of India may have accumulated a record high foreign exchange reserves, but it is a losing proposition given that a nearly 25 percent jump in fact led to a fall in returns by nearly a fifth. Returns on reserves deployment was lower at $4.3 billion during April-December’20 compared with $5.2 billion in the same period a year ago, according to the latest data from the RBI.
While this alone may not dent the transfer of surplus to the government, the amount of interest it paid to keep the system in surplus liquidity could hurt its returns as it paid interest for keeping funds with it. Banks are estimated to have parked over Rs 5 lakh crore on an average during FY’21 on which the central bank has to pay them 3.35 per cent interest. But smart treasury move by diversifying assets and unlocking unrealised gains could result in higher surplus transfer to the government even as profit is not the motive for the central bank’s reserve management strategy.
While RBI’s balance sheet has expanded since June 2020, yields on foreign currency investments have indeed reduced over the past year. “The $ 4.3 bn largely reflects coupon, not capital gains,” said Rahul Bajoria, chief India economist at Barclays Capital.
But the central bank can also encash on valuation gains in currency reserves. Valuation gains amounted to $23 billion during April-December’20 compared to $ 6.3 billion in the same period, a year ago. “RBI might have unlocked some of the foreign currency revaluation reserves through sales of foreign currency,” said Professor Ananth Narayan, associate professor at SP Jain Institute of Management and Research. “RBI has changed its accounting policy two years ago, that allows for such recognition. We will have to wait for the final results, but I do believe that depending on the foreign currency operations, a high dividend may still be possible”.
Besides, the central bank may also choose to optimise returns by diversifying its currency base. “Even if it earns lower interest income, there could be higher unrealised forex gains.” said Bajoria.” RBI has treasury securities maturing or they choose to sell and diversify”
But the central bank’s account year is shortened this year by ending its accounting year in March from June earlier which may anyway impact income.”This is also a truncated fiscal year of 9 months only, as RBI transitions from a June year-end to March year-end” said professor Narayan. “To that extent, the core seigniorage income would be lower”