Synopsis–The Reserve Bank of India (RBI) is weighing the option of engaging specialist money managers to help improve yields on the reserves fund as rates hit record lows globally. Given the increasing complexities of managing inflows from multiple channels, the RBI also wants better safeguards for the burgeoning corpus that now amounts to about a fifth of India’s gross domestic product (GDP).
Mumbai: India’s central bank is likely to engage external financial consultants to manage a part of its record $600-billion foreign exchange reserves, dusting off a playbook used nearly two decades ago when the corpus crossed the twelve-digit threshold for the first time.
The Reserve Bank of India (RBI) is weighing the option of engaging specialist money managers to help improve yields on the reserves fund as rates hit record lows globally. Given the increasing complexities of managing inflows from multiple channels, the RBI also wants better safeguards for the burgeoning corpus that now amounts to about a fifth of India’s gross domestic product (GDP).
Select global institutions are said to have informally reached out to the RBI, multiple sources told ET. Among them are some Big Four consulting firms and financial institutions.
“Although no formal appointment has been made so far, the central bank is seriously pursuing the option in line with global trends,” said one of the industry sources cited above.
RBI did not immediately respond to ET’s queries.
Some prominent Southeast Asian central banks have reportedly appointed long-term asset managers to partially manage their foreign-currency funds.
‘Strategy Could be Multi-fold’
India’s foreign exchange reserves are officially expected to touch the $600-billion mark this Friday, the central bank indicated in its annual report published two weeks ago. Admittedly, a cash pile of this magnitude would help cushion import shocks. Still, the size alone would pose balance sheet management challenges to the RBI in a global environment of record low interest rates.
“The central bank’s strategy could be multi-fold, and it could involve diversification of asset class and geography besides engaging external asset managers for boosting investment returns,” said Vivek Kumar, an economist at QuantEco, an economic research firm. “Outsourcing a part of the reserves management must be accompanied by an investment mandate from the RBI board along with provisions for in-house capacity enhancement and knowledge transfer.”
A negative or low-rate environment, which is expected to persist for some time, is posing challenges to central banks across the globe. India’s current level of reserves is sufficient to cover 14-15 months of pre-Covid merchandise imports. In addition, they would cover 104% of India’s external debt as of December 2020. By most metrics, India’s forex reserves appear adequate and comfortable from a macro-financial insurance perspective.
“Given the size of the reserves, RBI could manage a small portion of its reserves more aggressively,” said Abheek Barua, chief economist at HDFC Bank. “Its reserves management policy has some impact on the fiscal situation in terms of surplus transfer (or, RBI dividend).”
In its latest annual report, the central bank said that its agenda was to “continue to explore new asset classes, new jurisdictions/markets for deployment of foreign currency assets (FCA) for portfolio diversification, and in the process tap advice from external experts, if required.”
This low-yield environment makes it difficult for asset managers in general — and reserves managers in particular — to generate reasonable returns on their portfolios given their risk appetites. An increasing pile of negative yielding debt across the developed world has made matters worse, posing capital preservation challenges.
In 2003-04, the year in which RBI’s forex reserves crossed the $100-billion mark for the first time, Mint Road had sought external assistance in managing a part of the corpus.
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