RBI liquidity withdraw

RBI liquidity withdraw

Subject: Economy

Context:

The Reserve Bank of India (RBI) withdrew $66.73 billion from overseas during the six-month period ended September 2022 according to the RBI’s half-yearly report on ‘Management of foreign exchange reserves’.

Details of the Report:

• As of September 2022, out of the total foreign currency assets of $472.81 billion:
  • $361.84 billion was invested in securities,
  • $81.64 billion was deposited with other central banks and the BIS
  • $29.33 billion comprised deposits with commercial banks overseas.
• The RBI pulled out $58.9 billion from its deposits in other central banks and Bank of International Settlements.
• India’s deposits in other overseas commercial banks also declined by $7.83 billion to $29.32 billion.
• The share of gold in the total foreign exchange reserves increased marginally from about 7.01 per cent as at end-March 2022 to about 7.06 per cent as at end-September 2022.
• Foreign exchange reserves cover of imports declined to 10.4 months in June 2022.
• The ratio of short-term debt (original maturity) to reserves increased to 22.0 per cent at end-June 2022.
• The ratio of volatile capital flows to reserves increased to 67.6 percent at end-June 2022.

Why withdraw overseas deposits?

• To appreciate the rupee which has been under pressure due to the appreciation of the dollar.
  • It will increase domestic supply of dollars relative to the rupee thus appreciate the rupee.

Concept

Forex management:

• The Reserve Bank of India, is the custodian of the country’s foreign exchange reserves and is vested with the responsibility of managing their investment.
  • The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.
• The Reserve Bank of India Act permits the Reserve Bank to invest the reserves in the following types of instruments:
  • Deposits with Bank for International Settlements and other central banks
  • Deposits with foreign commercial banks
  • Debt instruments representing sovereign or sovereign-guaranteed liability of not more than 10 years of residual maturity
  • Other instruments and institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act
    • The central bank has the mandate to invest up to $5 billion in the bonds issued by the India Infrastructure Finance Company (UK) Limited.
  • Certain types of derivatives

The foreign currency assets

• It comprises multi-currency assets that are held in multi-asset portfolios as per the existing norms, which conform to the best international practices followed in this regard.
• According to the RBI, except fixed deposits with the BIS, commercial banks overseas, central banks and securities issued by supranationals, almost all other types of investments are highly liquid instruments which could be converted into cash at short notice.
• The Reserve Bank closely monitors the portion of the reserves, which could be converted into cash at a very short notice, to meet any unforeseen/ emergency needs