reserve Bank of India Adding to the financial costs of managing reserves in the midst of falling global yields, it may seek to abandon its traditional approach to forex reserves management internally. A research paper by economists from the Reserve Bank of India suggests that the central bank should be more proactive in its foreign currency property management including looking beyond SDR Currencies and its active management gold reserves.

Global interest rates, which have been declining over the past four decades in advanced economies, touched their all-time low in 2020. “This low yield environment has made it a difficult task for reserve managers to generate reasonable returns on their foreign assets,” said one. Paper by Ashish Saurabh and Nitin Madan of the Department of External Investments and Operations, RBI.

“Reserve managers can tackle low-yield environments by increasing the tenure of their portfolios, investing in new asset classes, new markets, and more proactive management of their gold stocks,” he added. Designed to suit the risk appetite, investment preferences, skill sets and operational capabilities of individual institutions.

In its latest annual report, the central bank said its agenda for 2021-22 was to “continue to explore new asset classes, new jurisdictions/markets for deployment of foreign currency assets”.FCA) Consult outside experts for portfolio diversification and in this process, if necessary.

RBI has been accumulating dollars rapidly during the pandemic which is $639 billion as of October 08 and has stashed over $100 billion since the pandemic, adding to the challenge of foreign exchange reserves management.

The low return on reserve deployment affects the earnings of the RBI. The surplus or profits that the RBI makes in a year are transferred to the government, which helps it manage the fiscal deficit. But at the same time, the foreign investor from whom RBI buys dollars earns a lot from local investment. In addition, the plethora of reserves adds to the liquidity management challenge for the central bank. Income from foreign sources declined by 47 per cent to Rs 25,469 crore in FY20-21, while there was a huge increase in reserves. The central bank managed high surplus transfers to the government due to low provisioning during the year, although it was a short accounting year for the central bank.

According to a survey by central banking portal “centralbanking.com”, reserve managers have found the reduction in yields since March 2020 as the most challenging aspect of their job. The majority of the participants in the survey, conducted in February-March’21, acknowledged that the low yield environment, particularly in major reserve currencies, led to investments in new markets, investment in new asset classes, reserve management policies in favor of investments and practices have changed. More currencies and minimum credit rating changes are accepted.