The Hindu Business Line : Forex reserves: Reddy for low-risk investments

Dr Y.V. Reddy, RBI Governor, is in favour of investment of foreign exchange reserves in marginal return but low-risk instruments rather than high-risk, high-return options. With the increasing level of forex reserves, many countries are shifting to higher yielding instruments with a higher risk-return equation, he said.

The Governor's view assumes significance in the context of the on-going debate on the cost of maintaining the reserves and their investment options.

Speaking on `Foreign Exchange Reserves: New Realities and Options' in Singapore on Tuesday, Dr Reddy said that with rising global interest rates, there is always a lurking fear in the emerging market economies that the current level of capital flows may not be maintained.

Thus the comfort level of reserves should be viewed not just with respect to the current situation alone, but it should also take into account the assessment of emerging risks. "Disruption in financial markets in the form of large cross-currency volatility and sharp rise in interest rates are not unlikely in the global economy," he said.

Many emerging economies have accumulated significant reserves. A new development in the reserve management is to hold a part of the reserves, which could be used by the public sector in a country and in a manner different from the strictly defined pattern of holding of external assets by the monetary authorities. Dr Reddy citied the examples of Singapore, South Korea and China that have taken such steps.

According to the Bank for International Settlements, the emerging market economies have accumulated reserves at an annual rate of $250 billion (or 3.5 per cent of their annual combined GDP), during 2000-05, which was almost five times higher than the level seen in the early 1990s, Dr Reddy said.

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