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Meaningful reading from RBI publications
The Reserve Bank of India publishes reviews periodically. Last week, it published half yearly report on management of foreign exchange reserves. This is a critical responsibility for RBI as the management of reserves has a bearing on the direction of the rupee. India’s equity markets rely on foreign institutional investor flows. An efficient management of the rupee is essential to ensure sustainable flows.
Here are takeaways from this report:
Where are foreign currency reserves invested:
The foreign currency assets are invested in multi-currency, multi-asset portfolios. As at end-September 2013, out of the total foreign currency assets of $ 248.8 bn, RBI invested $ 155.7 billion in various foreign government securities, $ 86.6 billion was deposited with other central banks, Bureau of International Settlement and the IMF. The remaining $ 6.6 billion were put in deposits with foreign commercial banks and funds placed with the External Asset Managers.
The Reserve Bank held 557.8 tonnes of gold, of which 265.5 tonnes was held abroad with the Bank of England and the Bank for International Settlements. It forms about 7.9% of the total foreign exchange reserves in value terms (USD) as on September 27, 2013.
How adequate are foreign exchange reserves:
Adequacy of reserves has emerged as an important parameter in gauging the ability to absorb external shocks. With the changing profile of capital flows, the traditional approach of assessing reserve adequacy in terms of import cover (in number of months) has been broadened to include a number of parameters like the size, composition and risk profiles of various types of capital flows as well as the types of external shocks to which the economy is vulnerable.
Rupee could remain weak:
At the end of September, 2013, the import cover declined to 6.6 months from 7 months at end-March 2013. This means RBI has enough reserves to pay for six and a half months of imports in foreign exchange if India does not see any forex outflow. Short-term debt to foreign exchange rose to 34.2% from 33.1% in March 2013. The ratio of volatile capital flows (defined to include cumulative portfolio inflows and short-term debt) to the reserves increased to 97.3 per cent in September 2013 from 94.3 per cent as at end-March 2013. This indicates that the rupee faced headwinds during the period.
During the quarter to December 2013, net inflows of non-resident Indian deposited amounted to $ 21.4bn against $ 2.7bn reported in the quarter to December 2012. This helped India manage the outflow of $ 5.9bn on account of repayments of corporate overseas borrowings and build-up of foreign currency assets. RBI initiated a new foreign currency deposit scheme to ensure that India had enough foreign exchange to meet the repayment requirement of companies.