RBI stares at lower returns as most reserves deployed in low yielding treasury bonds

RBI stares at lower returns as most reserves deployed in low yielding treasury bonds

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The Reserve Bank of India is staring at lower returns from its operations this year as its investment of as it has almost entirely parked the reserves accumulated this year into low yielding treasuries between April and September this year.
The share of investment in securities which is generally in top rated sovereign bonds, has gone up from 55 per cent in end March to 68 per cent in September, data with the central bank indicates. Of the $544.8 billion in reserves, $370.6 billion was in securities. While India’s- mostly the central bank’s- overall investment in US treasuries is $ 213.5 billion. RBI has been piling up reserves at a fast pace since the COVID induced lock-down and easy monetary policy by most central banks resulting in a steep surge in capital flows into emerging markets including India.

Four fifths of around $67 billion freshly piled-up reserves this year are in USTs where the benchmark yields less than a percent.

Furthermore, its interest payments on reverse repo parked by banks could pressure its earnings and the dividend to government. While the interest it earns on deploying is linked to global yields which is far less than the 3.35 per cent paid on an average daily surplus liquidity estimated at close to Rs 4 lakh crore . The forex inflows mopped by the central bank are released as rupee liquidity into the banking system and in turn is parked with the central bank.

“In a relatively stressed scenario, the potential for greater reserve accumulation amid currency appreciation pressure in the next two years could prove to be a drag on the RBI’s profitability” said Rahul Bajoria, India economist at Barclays Capital in a recent note. “Since it typically invest reserves in low yielding foreign securities, thereby create a drag on the balance sheet. This issue has fiscal implications as well.

Concern over the RBI’s balance sheet and the return on its assets has emerged as a cause of concern mainly because of recent issues between the Ministry of Finance and the Reserve Bank over dividend payments. RBI’s surplus transfer to the government in FY’20 was less by more than two times to Rs 57128 crore from Rs 1.6 lakh crore in FY’19.

In April-June quarter, investment on reserves earned RBI almost 16 per cent higher returns over April-June’19 at $1.7 billion, but by deploying much higher reserves during the period.

The central bank’s dollar purchases is also helping check the value the rupee and a strong rupee is helping check imported inflation, according to RBI governor Shaktikanta Das who is facing a challnge of managing inflation which had remained above the target for four consecutive months

Credit: Stocks-Markets-Economic Times

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