BackRBI should not cross the corporate bond Rubicon
While its excess forex reserves could be invested in private debt to make extra money, profits are not its goal and it must neither let its mandate get confused nor exceed its stability brief
PremiumThe Reserve Bank of India’s foreign exchange reserves have burgeoned beyond $600 billion, almost equalling fourth-placed Russia’s on a global chart of treasure chests topped by China’s $3 trillion-plus. While it includes gold, our vault is dominated by foreign currency assets held largely in the form of investments in ‘risk-free’ US Treasury bonds. Sovereign paper issued by top Western governments has yielded little for decades, but now yields even less after the great monetary easing of covid times. Market prices went high enough to push some of these bonds into negative-yield zone. Piling up even more has been an unattractive prospect of late. In the fiscal year ended 31 March, RBI earned just 2.1% on its foreign currency assets, down from 2.65% the year earlier, though it made tidy gains on its currency trades. Given its poor returns on government bonds, RBI might well have looked at novel ways to deploy its reserves more remuneratively. What has caught attention, however, are reports of an internal suggestion that safe foreign corporate bonds be explored as an option to get superior earnings. This would be a departure best avoided, not least for the slippery slope it could lead to.
As mandated by the RBI Act, our central bank’s usual practice is to put its forex pile safely into bullion and sovereign debt; deposits held with external banks are also allowed. It once carried out a small experiment of shuffling foreign government bonds to eke out extra money, but the idea was given up. As part of its routine tasks, RBI also conducts forex market operations. It has managers for that. A law amendment that lets RBI buy private foreign bonds, even if permitted only for top-rated debt, however, would expose our central bank to an entirely new category of risk and require portfolio management of quite another kind. RBI may well be able to equip itself with the requisite expertise, attuned to global corporate affairs as well as flaky A-plus ratings exposed by the financial crisis of 2008, and thus manage to make substantial sums of money, but the complexity of it could yet endanger India’s money. For RBI to stay scandal-free, discretionary calls taken on company bonds would also have to be placed under public scrutiny.
As a point of principle, RBI should not exceed its brief, which is mainly to manage monetary conditions in the interest of economic stability. Its core job is to keep the rupee’s value stable, after all, not maximize profits. Splintered objectives could involve conflicts. Moreover, market players must always have clarity on the central bank’s role. As it is, RBI’s currency bonanza of 2020-21 that helped it transfer a surplus of nearly ₹1 trillion to the Centre has aroused murmurs of a plainly profit-motivated churn of holdings, with hints dropped of the ease with which old dollars can profitably be converted into new. Defenders of a swerve in orientation argue that making money off markets is better than keeping a stash more or less idle. True, big dollar inflows and RBI mop-ups have enlarged our reserves above what’s adequate to cover six months of imports and meet external payment obligations in the short term. We may also have enough to spare on the defence of our currency in case of a sudden out-gush of capital. It’s also true that makeable money left unmade is lost. Even so, an opportunity cost does not justify a profit chase in global markets by an institution that has a weighty mandate. RBI mustn’t cross the corporate-bond Rubicon.
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