Investing forex reserves in equities can fetch higher returns

Subject – Economy

Context – Investing forex reserves in equities can fetch higher returns: RBI report

Concept –

Investment of India’s rising foreign exchange reserves in equity funds, especially index funds, can fetch higher returns as interest rates which have been on a declining trajectory over the last four decades in advanced economies, have touched their historic lows, a Reserve Bank of India (RBI) report has said.
Investment in equities is considered to be risky, especially for a central bank, which is responsible for safeguarding the reserves. However, investment of a small portion of the reserves in an index fund has the potential to augment the return of the portfolio
This implies that if held for a long to very long period of time, despite volatility in the interim, it can not only preserve the capital but also fetch a return much higher than most of the investments.
On August 22, 2020, RBI Governor Shaktikanta Das said there was a clear disconnect between the sharp surge in markets and the state of real economy, as surplus global liquidity was driving up asset prices worldwide.
Reserve managers usually invest in highly rated sovereigns like G10 countries as they have deep bond markets and meet safety and liquidity criteria of the reserve managers. However, there are some countries which are relatively stable financially, are highly rated and offer better yields than some of the G7 countries, the RBI report said.