Fx Reserves


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Fx Reserves

  1. 1. Forex Reserves Management
  2. 2. Forex Reserve <ul><li>What is Forex? </li></ul><ul><li>Definition of International Monetary Fund (Balance of Payments Manual, and Guidelines on Foreign Exchange Reserve Management, 2001). </li></ul><ul><li>Reserve Bank of India Act 1934 - enabling provisions for the RBI to act as the custodian of foreign reserves, and manage reserves with defined objectives. </li></ul><ul><li>The foreign exchange reserves include three items; gold, SDR and foreign currency assets. (SDR- a transferable right to acquire another country's currency) </li></ul>
  3. 3. Definition of Forex <ul><li>Foreign currency and the securities held by the public including the banks and corporate bodies are not accounted for in the definition. </li></ul><ul><li>RBI manages reserve in an extremely conservative fashion within the overall policy framework agreed upon with Government of India. </li></ul><ul><li>RBI functions as the custodian and manager of forex reserves. </li></ul>
  4. 4. Importance <ul><li>Primarily as a last resort stock of foreign currency for unpredictable flows. </li></ul><ul><li>Related to wealth and the cost of covering unplanned deficit. </li></ul><ul><li>Maintain or manage the exchange rate, while enabling orderly absorption of international money and capital flows. </li></ul><ul><li>The aggregate of national interests, to achieve balance between demand for and supply of foreign currencies, for intervention. </li></ul><ul><li>Preserve confidence in the country’s ability to carry out external transactions. </li></ul>
  5. 5. Importance <ul><li>So a list of objectives in broader terms may be encapsulated – </li></ul><ul><li>Maintaining confidence in monetary and exchange rate policies </li></ul><ul><li>Enhancing capacity to intervene in forex markets. </li></ul><ul><li>Limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis including national disasters or emergencies. </li></ul><ul><li>Providing confidence to the markets especially credit rating agencies that external obligations can always be met. </li></ul><ul><li>Providing domestic macroeconomic stability and economic growth. </li></ul>
  6. 6. Evolution of Reserve Management Policy in India <ul><li>BOP Crisis 1991- </li></ul><ul><li>Increased borrowing from foreign sources in the late 1980s, which helped fuel economic growth. </li></ul><ul><li>August 1990 -Iraq invaded Kuwait, and the price of oil soon doubled. </li></ul><ul><li>Domestic social and political instability - government fell in November 1990 and was succeeded by a minority government. </li></ul><ul><li>Paradigm shift with the loosening government regulations, especially in the area of foreign trade. </li></ul>
  7. 7. Current status and policies <ul><li>INDIA is said to be a 912 billion dollar economy with growth of close to nine per cent for over three years. </li></ul><ul><li>reserves has steadily increased from US$ 5.8 billion as of 1991 to US$ 300.5 billion as at August 8,2008. </li></ul><ul><li>Inflow: </li></ul><ul><li>Currently holdings of gold have been virtually unchanged other than occasional sales of gold by the government to the RBI. The gold reserves are managed passively. </li></ul><ul><li>Foreign currency reserve is mainly purchased by RBI from the Authorized Dealers (Open market Operation) </li></ul><ul><li>Deployment of forex assets held in the portfolio of RBI (i.e. reserves) which are invested in appropriate instruments of select currencies as per the RBI act. </li></ul>
  8. 8. Current status and policies <ul><li>Outflow: </li></ul><ul><li>Sale of foreign currency to Authorized Dealers </li></ul><ul><li>Forex is made available from reserves for identified users to meet the demands of forex market. </li></ul><ul><li>Sometimes reserves are used as a convenient mechanism for government purchases of goods and services, servicing foreign currency debt of government, insurance against emergencies, and in respect of a few, as a source of income </li></ul>
  9. 9. FX Reserves Management – A Critical Appreciation <ul><li>Deployment in US Government papers – ensuring safety and liquidity but low yields </li></ul><ul><li>Holding sufficient reserves protects a country from external shocks( capital flight and currency crises ) but opportunity costs are involved ( opportunity cost of not using these resources to help increase domestic productivity. ) </li></ul><ul><li>Rangarajan Committee Report – Fixing FX reserves target for 3 months import </li></ul>
  10. 10. FX Utilization-New Strategies <ul><li>Create Sovereign Wealth Fund like Temasek, GIC(Singpapore), KIA (Kuwait) </li></ul><ul><li>( for investing in corporate sovereign bonds, equities, real estate holdings and private equity holdings in different parts of the world ) </li></ul><ul><li>Investment in domestic infrastructure </li></ul><ul><li>Acquire new technologies to scale up productivity of the industry </li></ul><ul><li>help corporate entities to aggressively restructure their expensive foreign debt or allow the government to use them for repaying the high cost of debts that are outstanding </li></ul>
  11. 11. Conclusion <ul><li>GoI and RBI should promote studies and research to </li></ul><ul><li>Examine the possibilities for identifying more “development-friendly” determinants of the size and structure of foreign reserves </li></ul><ul><li>Assess the “optimality” of the foreign reserve policies in economies of the region </li></ul><ul><li>Support the exploration of alternative approaches to the management of reserves portfolios </li></ul><ul><li>Explore the possibility of creating collateral credit facilities in the region International organizations, such as IMF, World Bank, Asian Development Bank etc… </li></ul>