RBI looks at foreign corporate bonds to generate higher yield

Struggling to generate enough returns on its investments, the Reserve Bank of India (RBI) is thinking beyond gold and sovereign debt to invest in foreign corporate bonds, The Mint reported on Monday (June 14).

The move is aimed at generating higher income out of its $600 billion forex reserves, which is one fifth of the country’s gross domestic product (GDP) now. The RBI’s annual report for 2020-21 states that the rate of earnings on foreign currency assets has dropped from 2.65 per cent a year ago to 2.1 per cent now.

Last week, India’s foreign exchange reserves crossed the $600 billion mark for the first time ever. Since then the RBI has been exploring new allocations for its foreign currency assets (FCA) with an aim to diversify portfolio and also look at the possibility of seeking advice from external investment experts.

The apex bank wants external investment managers to look after a part of the swelling forex reserves, the way it used to happen a few years back. The managers will be expected to generate higher yields on the reserves because global interest rates have been falling in the backdrop of the pandemic.

RBI’s annual report for 2021 too stated that a few investment managers have approached the bank to manage its forex reserves.

Earlier, global institutions and investment managers used to invest in instruments in accordance with the RBI Act, but the practice was stopped a few years back. “We want to give a benchmark and see how we performed against it. We used to give only $10 million in 1995. They were not allowed to invest in anything else other than government bonds. But you cannot compare managing $10 million as against $600 billion,” a former RBI official told The Mint.

Also read: Inflation? Growth? There’s much ado over ideal monetary policy target

In the week ending June 4, the country’s reserves rose to a record $605.008 billion, almost at par with Russia’s ($605.2 billion) as the fourth largest reserve in the world. This hike was aided by a rise in foreign currency assets (FCA), a major component of the overall reserves.

Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.