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Mumbai, Apr 3 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 so 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 (FCAs) and gold, after accounting for depreciation, decreased from 4.16 per cent in July, 2008, to June, 2009, to 2.09 per cent in July, 2009, to 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.
Accordingly, 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.
Contrast this with the current interest rate in the country, which had been spiked as many as eight times since March, 2010, and adjust this with the current inflation of 8.31 per cent. A 390-day term deposit gets you as much as 9 per cent or more return today and even saving bank rates offer a higher return of a full 3.50 per cent.
Headline inflation, after hovering in high double digits, came down to 8.31 per cent in February, while food inflation for the third week of March stood at 9.5 per cent.
But both these numbers were in high double digits for most part of the last fiscal, forcing the RBI to raise short-term borrowing and lending rates as many as eight times since last March.
After the recent mid-quarter review, the current short-term lending repo rate is pegged at 6.75 per cent, while the short-term borrowing rate, or reverse repo, stands at 5.75 per cent. The bank rate and cash reserve ratio are kept at 6 per cent each.
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