The Hindu Business Line : Rs 30,000-cr hole in currency valuation account

Chennai, Jan 4 An RBI press release on December 31, without deviating a single inch from the truth, managed to leave many people with the impression that the days of huge valuation losses on forex are now behind us.

“Reflecting the appreciation of major currencies against the US dollar’, said the release, the $40 billion increase in forex reserves between April and September 2007 was supplemented by a $8 billion valuation gain (on total reserves, aggregating $240 billion).

The problem is that while major currencies rose vis a vis the dollar, thus swelling the dollar value of our reserves, they all fell vis-a-vis the rupee.

So rather than booking valuation gains, India in fact took a hit of Rs 92,000 crore between April and September 2007.

However, as reported by Business Line, most of this loss was accounted for in the RBI’s Annual Report for 2006-07, which stated that as a result of a Rs 65,000-crore hit in the Currency and Gold Revaluation Account (CGRA), the cumulative balance in this account dropped from Rs 86,789 crore in June 2006 to Rs 21,723 crore in June 2007.

But this statement, tucked away in Chapter X of the RBI report, failed to mention that (i) putting aside the rise in the price of gold over the years, the CGRA had a nil balance in June 2007, and (ii) that it would have been utterly impossible for the RBI to pay a Rs 46,000-crore dividend to the Centre this year if it had followed a ‘mark to market’ policy for its reserves.

Compared to the April-September loss, the additional loss on currency valuation between the end of June and December 21, 2007 is a comparatively meagre Rs 31,000 crore, while the value of the RBI’s gold reserves went up over this period by another Rs 2,000 crore.

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