The uncertainties surrounding the covid-19 pandemic has forced the Reserve Bank of India (RBI) to reshuffle the weightages of its foreign currency assets (FCA).
RBI’s deposits with other central banks and the Bank for International Settlements (BIS) accounted for 33.37% of FCA at March-end, up from 28.83% at the end of September last year. This rebalancing is at the cost of RBI’s investment in securities, as a percentage of its FCA, falling from 63.72% to 59.57% during the same period.
FCA, gold, special drawing rights issued by the International Monetary Fund and reserve tranches maintained with it by RBI, make up for the total foreign exchange reserves. RBI’s FCA are typically divided into investment in AAA-rated sovereign securities, deposits with other central banks and BIS, and deposits with overseas commercial banks . According to RBI’s half-yearly report on management of foreign exchange reserves, of the total foreign currency assets of $442.21 billion at end-March, $263.45 billion was invested in securities, $147.55 billion was deposited with other central banks and BIS, and the balance $31.21 billion comprised deposits with commercial banks overseas.
While the total FCA have risen 10%, compared to September-end, RBI’s deposits with other central banks and BIS have increased disproportionately by over 27%. At the same time, the central bank’s investments in securities have risen by only 2.8% during the same period. The RBI report said: “movements in the FCA occur mainly on account of purchase and sale of foreign exchange by the RBI, income arising out of the deployment of the foreign exchange reserves, external aid receipts of the central government and changes on account of revaluation of the assets."
During the same period, total foreign exchange reserves have increased 10% from $433.7 billion to $477.8 billion. At end-December 2019, when reserves touched $460 billion, it was adequate to cover imports for 11.4 months, up from 10.4 months at the end of September 2019. RBI has not made available the import cover data for March-end.
Import cover of reserves is the traditional trade-based indicator of foreign exchange reserve adequacy. It shows how long imports can be sustained in the event of a shock.