UPSC Current – RBI exploring investment options for reserves

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RBI exploring investment options for reserves

Tags: GS 3, economic development

Context:

• The Reserve Bank of India (RBI) is looking at diversifying its foreign exchange reserve investments amid the fall in global interest rates caused by the COVID-19 pandemic.

Need for Diversification

• The RBI’s foreign exchange reserves stand at a record $560.63 billion.
• The central bank mostly invests in gold, sovereign debt and other risk-free deposits, has seen fall of returns as monetary policy loosened globally.
• As a result, the RBI is likely to increase its gold investments, as well buying dollars and exploring investing in AAA-rated corporate bonds for the first time to get better returns.

AAA-rated corporate bonds & why RBI is interested

• AAA-rated bonds have a high degree of creditworthiness because their issuers are easily able to meet financial commitments and have the lowest risk of default.
• Rating agencies Standard & Poor’s (S&P) and Fitch Ratings use the letters “AAA” to identify bonds with the highest credit quality.
• RBI was studying the possibility of investing in AAA-rated corporate dollar bonds, because it offers better returns than sovereign credit (It is the credit of a sovereign country backed by the financial resources of that state). Such investment has not been made in the past, so the central bank would move carefully.

Key points

• Foreign investors have continued to pour money into the Indian stock market because of its stronger returns
• The government is comfortable with current rupee levels. It needs to be competitive to help provide an export boost
• RBI will continue to buy dollar as both the RBI and the government are comfortable with a 73-75 per dollar range on the local currency.
• Despite a contraction in gross domestic product expected in the current fiscal year to March 2021, foreign flows have remained healthy.
• The rupee has fallen for three straight months to October. It is one of the worst-performing Asian currencies in 2020.
• The RBI has already started increasing its investment in gold gradually, Gold reserves stand at $36.86 billion as on Oct. 23 compared with $30.89 billion at the end of the last fiscal year in March
• Our 10-year yield is still at around 6% compared to near zero and negative interest rates globally, so we will see inflows continuing and RBI will keep buying dollars to prevent rupee appreciation
• Foreign investors bought shares worth $2.52 billion in October, taking total investment in 2020 to $6.47 billion.FIIs are net sellers of bonds worth $13.98 billion in 2020, they bought a net $459.30 million in October.

Source: The Hindu