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Doubling of Return on Foreign Currency Asset
Context:
RBI said with interest rates rising in the US and other developed countries amid high inflation, the return, or the interest earned, on India’s foreign currency assets(FCA) doubled to 4.21 per cent during the fiscal year ending March 2024 from 2.11 per cent in March 2022, the Reserve Bank of India.
About foreign currency assets(FCA):
- Comprise of multi-currency assets that are held in multi-asset portfolios.
- Multi-asset portfolios:As at end-March 2024, out of the total FCA of $ 570.95 billion,
- $ 468.99 billion was invested in securities e.g. bonds.
- $62.17 billion was deposited with other central banks and the BIS
- $ 39.79 billion comprised deposits with commercial banks overseas.
- Multi-currency assets :Foreign Currency Assets (FCA) has Dollars/Euro/Pound/Yen etc. which are easily accepted world wide, but mostly it is US Dollars.
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The Foreign Currency Assets (FCA) are around 90% of the Forex reserves. Forex Reserve = Foreign Currency Assets + Gold + SDR(Special drawing rights) + RTP(Reverse tranche Position) |
Reasons for increase in return on FCA:
- The US Federal Reserve hiked the effective federal funds rate (EFFR) to 5.33 per cent in the last two years, which is higher than the long-term average of 4.61 per cent.
- Annual inflation rate in the US was 3 percent cent.After adjusting for inflation, the return on FCA is positive for the RBI.
- Though Repo rate is currently 6.50 per cent and State Bank of India (SBI) offers an interest rate of 7 per cent on two-year deposits still adjusted for inflation(>5%), the return is similar to in the USA .
- CD (certificate of deposit) rates offered by US banks are in the range of 5.20 per cent.
- RBI reduced the gold kept in safe custody with the Bank of England and the Bank for International Settlements (BlS) by around 50 tonnes to 387.26 metric tonnes during FY24. The RBI apparently reduced the gold held abroad due to the high cost involved.
Certificate of Deposit
- Certificates of Deposits are negotiable/tradable, unsecured money market instruments issued by Scheduled Commercial Banks (and some All India Financial Institutions like NHB, SIDBI etc. but mostly by banks) for a maturity period up to one year against funds deposited at the bank.
- As the demand for credit/loan is increasing, banks are raising money (through issuance of CDs) which they can use for lending purposes.
- But whatever money has been raised through CDs, all can’t be lent, some money should be kept as reserves.
Bank for International Settlements
- Mission is to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks.
- Established in 1930, the BIS is owned by 63 central banks, representing countries from around the world that together account for about 95% of world GDP. Its head office is in Basel, Switzerland.
- It provides common standards of banking regulation.
- Basel norms (I/II/III) is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision(part of BIS) in response to the financial crisis of 2007-09.
- The measures aim to strengthen the regulation, supervision and risk management of banks.