The Hindu Business Line : Some forex pile under external managers

LIKE other emerging market economies, India too has a small portion of its bulging foreign exchange reserves at the disposal of external asset managers.

"The asset managers are carefully selected from among the internationally reputed ones. They are given clear investment guidelines and benchmarks and their performance is evaluated at periodic intervals,'' said the Report on Currency and Finance 2002-03.

Several emerging market economies such as Brazil, Chile, Mexico and Korea use external managers for reserve management. India too has joined the bandwagon with the objectives of gaining access to and deriving benefit from their market research. However, the overall stance of the RBI's reserve management policy continues to be a risk averse, aimed at stable returns.

The reserves are broadly invested in the four currencies — dollar, euro, Pound sterling and yen.

The forex reserves are invested in multi-currencies in multiple markets, which constantly undergoes change. With regards to exchange rate, the report stated, "Capital flows have been observed to cause overshooting of exchange rates as market participants act in concert with pricing information. Capital flows have implications for the conduct of domestic monetary policy and exchange rate movement. The important message that comes out from the analysis of various episodes of volatility and the policy response is that flexibility and pragmatism are needed in exchange rate policy in developing countries, rather than adherence to strict theoretical rules.''

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