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Harish Damodaran

New Delhi , Sept. 8

THE Reserve Bank of India (RBI) is caught in a peculiar situation where it is being forced to offload relatively high interest bearing domestic assets, even while it keeps accumulating foreign currency assets yielding lower returns by the day.

A perusal of the central bank's Annual Reports for recent years (July-June) shows that between 1997-98 and 2002-03, the share of forex assets in RBI's total assets has gone up from 34.7 per cent to over 70 per cent. In absolute terms, the increase has been from Rs 1,01,830.77 crore to Rs 3,65,000.98 crore, even as the domestic asset base has shrunk from Rs 1,91,482.07 crore to Rs 1,54,812.91 crore.

In spite of the share of forex assets doubling in the last five years, their contribution to RBI's topline has risen just a tad, from 40.4 per cent to 42.4 per cent. A starker picture emerges, when one compares 2002-03 with 2000-01. During this period, a Rs 1,73,774.92-crore surge in the central bank's forex assets has been accompanied by an absolute decline of Rs 259.43 crore in income from the deployment of these assets!

On the other hand, notwithstanding a Rs 61,433.46-crore depletion in domestic assets (which include Government securities, loans and advances to States, banks and financial institutions, etc) over this period, RBI's earnings from these have swelled by Rs 1,596.20 crore.

During 2002-03, the central bank's return on its foreign currency assets — income as a proportion of the average level of assets held during the fiscal - stood at a mere 3.1 per cent. As against this, the corresponding return from domestic assets amounted to 8.54 per cent.

It is natural to ask then if domestic assets indeed yield much more than forex assets, why is RBI increasingly offloading the former, while at the same time accumulating the latter?

However, there is a reason for RBI's actions, stemming from its basic central banking functions of ensuring exchange rate stability and controlling inflation. In order to protect exporters from excessive rupee appreciation, RBI has been compelled to mop up the bulk of capital flows into the country in recent times. This has led to a build-up of its forex assets at a time of falling global interest rates.

Between May 16, 2000 and June 25, 2002, the US Federal Reserve has brought down its benchmark rate from a decade high of 6.5 per cent to a 45-year-low of one per cent, giving RBI little scope to earn from investment of its assets abroad.

But since large-scale forex purchases entail corresponding release of rupee resources into the system with potential inflationary consequences, RBI has had to periodically suck in (`sterilise') this liquidity by offloading its domestic security holdings in the market. During 2001-02 and 2002-03, RBI's net open market operations sales of securities, mostly high-yielding paper, totalled Rs 84,115 crore.

In fact, profit from such sales amounted to Rs 4,798.03 crore in 2002-03, constituting almost 36 per cent of its Rs 13,358.99 crore earnings from domestic assets.

The flip side to this though is that income of this nature is a one-time affair, which simultaneously involves depletion of RBI's stock of relatively high interest-bearing domestic paper.

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Forex assets double but earnings up a tad for RBI — High-yielding domestic assets base shrinks

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