Foreign Exchange Reserves - RBI review
The Reserve Bank of India undertook a review of the main policy and operational matters relating to management of the reserves, including transparency and disclosure and decided to compile and make public half-yearly reports on management of foreign exchange reserves for bringing about more transparency and also for enhancing the level of disclosure in this regard.
1. Introduction
The level of foreign exchange reserves had steadily increased from US$ 5.8 billion as at end-March 1991 to US$ 113.0 billion by end-March 2004 and further to US$ 151.6 billion by end-March 2006. It stood at US$ 199.2 billion as at end-March 2007. Although both US dollar and Euro are intervention currencies, the foreign exchange reserves are denominated and expressed in US dollar only.
2. Review of Growth of Reserves since 1991
India's foreign exchange reserves have grown significantly since 1991. The reserves, which stood at US$ 5.8 billion at end-March 1991 increased gradually to US$ 25.2 billion by end-March 1995. The growth continued in the second half of the 1990s, with the reserves touching the level of US$ 38.0 billion by end-March 2000. Subsequently, the reserves rose to US$ 113.0 billion by end-March 2004, US$ 141.5 billion by end-March 2005, US$ 151.6 billion by end-March 2006 and further to US$ 199.2 billion by end-March 2007. It may be mentioned that forex reserves data prior to 2002-03 do not include Reserve Tranche Position (RTP) in IMF.
3. Sources of Accretion to Reserves in the Recent Period
The increase in foreign exchange reserves in the recent period has been on account of capital and other inflows. Major sources of increase in foreign exchange reserves for the year 2006-07 have been: (a) External commercial borrowings (b) foreign investment and (c) short-term credit.
4. External Liabilities vis-à-vis Foreign Exchange Reserves
The accretion of foreign exchange reserves needs to be seen in the light of total external liabilities of the country. India's International Investment Position (IIP), which is a summary record of the stock of country's external financial assets and liabilities, is available as of December 2006.
5. Prepayment/Repayment of external debt
The significant increase in forex reserves enabled prepayment of certain high-cost foreign currency loans of the Government of India from the Asian Development Bank (ADB) and the World Bank (IBRD) amounting to US$ 3.03 billion during February 2003. During 2003-04, prepayment of certain high cost loans to IBRD and ADB amounting to US$ 2.6 billion was carried out by the Government. Additionally, prepayment of bilateral loans amounting to US$ 1.1 million was also made. Thus, the total quantum of prepayments was of the order of US$ 3.7 billion during 2003-04. During 2004-05, prepayment of bilateral loan to the tune of US$ 30.3 million was made. During 2005-06, no prepayment of high-cost multilateral/bilateral loan was carried out. During 2006-07, there was only one prepayment of US$ 58.7 million in the month of April 2006.
6. Financial Transaction Plan (FTP) of IMF
International Monetary Fund (IMF) designated India as a creditor under its Financial Transaction Plan (FTP) in February 2003, in terms of which India participated in the IMF's financial support to Burundi in March-May 2003, with a contribution of SDR 5 million and to Brazil in June-September 2003 with SDR 350 million. In December 2003, SDR 43 million was made available to Indonesia under FTP. During 2004-05, SDR 61 million was made available under FTP to countries like Uruguay, Haiti, Dominican Republic and Sri Lanka. During May-June 2005, SDR 34 million was made available to countries like Turkey and Uruguay. Thus, the total quantum of India's contribution under FTP by way of purchase was SDR 493 million at end-June 2005. There were no purchase transactions after June 2005. India was included in repurchase transactions of the FTP since November 2005. There have been 9 repurchase transactions during the period from November 2005 to April 2007 totaling SDR 677 million received from 5 countries, viz., Turkey, Algeria, Brazil, Indonesia and Uruguay.
7. Adequacy of Reserves
Adequacy of reserves has emerged as an important parameter in gauging its ability to absorb external shocks. With the changing profile of capital flows, the traditional approach of assessing reserve adequacy in terms of import cover has been broadened to include a number of parameters which take into account the size, composition and risk profiles of various types of capital flows as well as the types of external shocks to which the economy is vulnerable. The High Level Committee on Balance of Payments, which was chaired by Dr. C. Rangarajan, erstwhile Governor of Reserve Bank of India, had suggested that, while determining the adequacy of reserves, due attention should be paid to payment obligations, in addition to the traditional measure of import cover of 3 to 4 months. In 1997, the Report of Committee on Capital Account Convertibility under the chairmanship of ShriS.S.Tarapore suggested four alternative measures of adequacy of reserves which, in addition to trade- based indicators, also included money-based and debt-based indicators. Similar views have been held by the Committee on Fuller Capital Account Convertibility.
8. Investment Pattern and Earnings from Foreign Exchange Reserves
The foreign exchange reserves are invested in multi-currency, multi-asset portfolios as per the existing norms, which are similar to international practices in this regard. As at end-March, 2007, out of the total foreign currency assets of US$ 191.9 billion, US$ 53.0 billion was invested in securities, US $ 92.2 billion was deposited with other central banks, BIS & IMF and US$ 46.8 billion was in the form of deposits with foreign commercial banks.