80% of RBI's forex assets deployed in overseas sovereign bonds and securities

The Reserve Bank deployed its incremental reserves pile-up during the second half of fiscal FY'2022-23 in bonds and securities, mostly US treasury bonds and bonds issued by top-rated sovereigns according to the latest half-yearly report on foreign exchange management released by the central bank.

As at end-March 2023, out of the total foreign currency assets of $509.69 billion, $ 411.65 billion was invested in securities, up from $ 361.84 billion in September. The share of securities has gone up from 76.53 percent in September’2022 to 80.76 percent in March 2023, according to the report.

Significantly the central bank has hiked the exposure in securities at times when interest rates are hardening and it faces a mark to market losses. But market analysts point out that though there could be some mark-to-market losses on its historical bond portfolio, the central bank ends up earning higher interest on new investments, thus giving a small boost to interest income.

But the central bank’s reserves management strategy is not guided by profit motive. “ While safety and liquidity constitute the twin objectives of reserve management in India, return optimization is kept in view within this framework” the RBI said.

Though historically investments of foreign currency assets are managed by the central bank’s treasury department, of late it has started hiring the services of external fund managers .“ With the objective of exploring new strategies and products in reserve management while diversifying the portfolio, a small portion of the reserves is being managed by external asset managers” the central bank said in its report. “The investments made by the external asset managers are governed by the permissible activities as per the RBI Act, 1934”.

During the half-year period under review, reserves increased from $532.66 billion at end-September 2022 to $ 578.45 billion at end-March 2023.

Although both the US dollar and Euro are intervention currencies and the Foreign Currency Assets (FCA) are maintained in major currencies, the foreign exchange reserves are denominated and expressed in US dollar terms.

Movements in the FCA occur mainly on account of the purchase and sale of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the Central Government and changes on account of revaluation of the assets.