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Even as domestic interest and inflation rates shot through the roof, the country's $303 billion-plus (Rs 13.63 trillion) forex reserves fetched a measly 2.09 per cent return for the year ended June 2010, which, if adjusted against inflation at 8.31 per cent, is a negative return on the asset.
This has happened because the Reserve Bank has chosen to invest those monies in foreign markets/assets and not in the domestic market/assets. However, it has to be noted that the RBI could not have done otherwise under the prevailing rules governing foreign exchange reserves management.
“The rate of earnings on foreign currency assets and gold, after accounting for depreciation, decreased from 4.16 per cent in July 2008- June 2009, to 2.09 per cent in July 2009-June 2010, reflecting the generally low global interest rate environment,” the RBI's half-yearly report on management of forex reserves released last week said.
Low yield
Accordingly, the RBI could only get an interest yield of a paltry Rs 27,000 crore from this 2.09 per cent interest rate — which is even way below the return rate on savings accounts — on this mound of cash. However, had the central bank chosen to deploy these funds in the country, it would have fetched as much as 4.5 times more return at a whopping Rs 1,21,900 crore at the prevailing interest rates.
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