Content
Movement of Reserves
1. Introduction
2. Review of Growth
of Reserves since 1991
3. Sources of Accretion to Reserves
in the Recent Period
4. External Liabilities vis-à-vis
Foreign Exchange Reserves
5. Prepayment/Repayment of External
Debt
6. Financial Transaction Plan (FTP)
of IMF
7. Adequacy of Reserves
8. Investment Pattern and Earnings
from Foreign Exchange Reserves
Foreign Exchange Reserves
The Reserve Bank of India (RBI)
undertook a review of the main policy and operational matters relating to management
of the reserves, including transparency and disclosure and decided to compile
and make public half-yearly reports on management of foreign exchange reserves
for bringing about more transparency and also for enhancing the level of disclosure
in this regard. These reports are being prepared with reference to positions
as of 31st March and 30th September each year, with a
time lag of about 3 months. The first such report with reference to September
30, 2003 was placed in the public domain on February 3, 2004. This is the sixth
report on foreign exchange reserves with reference to March 31, 2006. The report
is a compilation of quantitative information with regard to external reserves,
such as, level of foreign exchange reserves, sources of accretion to foreign
exchange reserves, external liabilities vis-à-vis foreign exchange reserves,
prepayment/repayment of external debt, Financial Transaction Plan (FTP) of IMF,
adequacy of reserves, etc. In order to avoid repetition, Sections II and III
of the first report, dealing with various matters relating to the qualitative
aspects of management of forex reserves and cross-country comparison of disclosure
in respect of management of external reserves, respectively, do not figure in
this report. Interested readers may refer to March 2004 issue of RBI Bulletin
or visit RBI website (www.rbi.org.in) for
accessing the first report on foreign exchange reserves.
Movement of Reserves
1. Introduction
The level of foreign exchange reserves
has steadily increased from US$ 5.8 billion as at end-March 1991 to US$ 113.0
billion by end-March 2004 and further to US$ 141.5 billion by end-March 2005.
It stood at US$ 151.6 billion as at end-March 2006 (Table 1). Although both
US dollar and Euro are intervention currencies, the foreign exchange reserves
are denominated and expressed in US dollar only.
Table 1: Movement in Reserves
|
|
|
|
|
(US $ million)
|
Date
|
FCA
|
SDR
|
GOLD
|
RTP
|
Forex Reserves
|
31-Mar-04
|
107,448
|
2 (1.6)
|
4,198
|
1,311
|
112,959
|
30-Sep-04
|
114,083
|
1 (1.0)
|
4,192
|
1,303
|
119,579
|
31-Mar-05
|
135,571
|
5 (3.0)
|
4,500
|
1,438
|
141,514
|
30-Sep-05
|
136,920
|
4 (3.0)
|
4,712
|
1,423
|
143,058
|
31-Mar-06
|
145,108
|
3 (2.0)
|
5,755
|
756
|
151,622
|
Note: 1. FCA (Foreign Currency Assets): FCA is maintained as a multicurrency
portfolio, comprising major currencies, such as, US dollar, Euro, Pound sterling,
Japanese yen, etc. and is valued in US dollars.
2. SDR: Values in SDR have been indicated in parentheses.
3. Gold: Physical stock has remained unchanged at approximately 357 tonnes.
4. RTP refers to Reserve Tranche Position in IMF
2. Review of Growth of Reserves
since 1991
India’s foreign exchange reserves
have grown significantly since 1991. The reserves, which stood at US$ 5.8 billion
at end-March 1991 increased gradually to US$ 25.2 billion by end-March 1995.
The growth continued in the second half of the 1990s, with the reserves touching
the level of US$ 38.0 billion by end-March 2000. Subsequently, the reserves
rose to US$ 76.1 billion by end-March 2003, US$ 113.0 billion by end-March 2004,
US$ 141.5 billion by end-March 2005 and further to US$ 151.6 billion by end-March
2006 (Chart 1). It may be mentioned that forex reserves data prior to 2002-03
do not include Reserve Tranche Position (RTP) in IMF, as RTP has been included
as part of the forex reserves only recently. Table 2 details the major sources
of accretion to foreign exchange reserves during the period from March 1991
to March 2005.
Table 2: Sources of Accretion to
Foreign Exchange Reserves since 1991
|
(US$ billion)
|
Items
|
1991-92 to 2005-06 (up to
end-March 2006)
|
A
|
|
Reserve Outstanding as on end-March 1991
|
5.8
|
B.I.
|
|
Current Account Balance
|
-28.8
|
B.II.
|
|
Capital Account (net) (a to e)
|
170.3
|
|
a.
|
Foreign Investment
|
93.9
|
|
b.
|
NRI Deposit
|
25.3
|
|
c.
|
External Assistance
|
11.8
|
|
d.
|
External Commercial Borrowings
|
20.3
|
|
e.
|
Other items in capital account
|
19.0
|
B.III.
|
|
Valuation change
|
4.4
|
|
|
Total (A+BI+BII+BIII)
|
151.6
|
3. Sources of Accretion to Reserves
in the Recent Period
The increase in foreign exchange
reserves in the recent period has been on account of capital and other inflows.
Major sources of increase in foreign exchange reserves the year 2005-06 have
been: (a) Foreign investment (b) short-term credit and (c) External commercial
borrowings. Table 3 presents sources of accretion to reserves during the year
2005-06.
Table 3: Sources of Accretion to
Foreign Exchange Reserves
|
|
(US $ billion)
|
Items
|
April-March
2005-06
|
April-March
2004-05
|
I.
|
|
Current Account Balance
|
-10.6
|
-5.4
|
II.
|
|
Capital Account (net)
(a to f)
|
25.7
|
31.6
|
|
a.
|
Foreign Investment
|
18.2
|
12.2
|
|
b.
|
Banking Capital
|
1.4
|
3.9
|
|
|
Of which: NRI Deposits
|
2.8
|
-1.0
|
|
c.
|
Short-term Credit
|
1.7
|
3.8
|
|
d.
|
External Assistance
|
1.4
|
1.9
|
|
e.
|
External Commercial Borrowings
|
1.6
|
5.0
|
|
f.
|
Other items in Capital Account
|
1.4
|
4.8
|
III.
|
|
Valuation Change
|
-5.0
|
2.4
|
|
|
Total (I+II+III)
|
10.1
|
28.6
|
An analysis of the sources of reserves
accretion during the entire reform period from 1991 onwards reveals that the
increase in forex reserves has been facilitated by an increase in the annual
quantum of foreign direct investment (FDI) from US $ 129 million in 1991-92
to US$ 5.7 billion in 2004-05 and further to US$ 7.2 billion in 2005-06. Outstanding
NRI deposits increased from US$ 13.7 billion at end-March 1991 to US$ 33.0 billion
as at end-March 2005 and further to US$ 35.2 billion as at end-March 2006. FII
investments in the Indian capital market, which commenced in January 1993, have
shown significant increase over the subsequent years. Cumulative net FII investments
increased from US$ 827 million at end-December 1993 to US$ 35.9 billion as at
end-March 2005 and further to US$ 45.3 billion as at end-March 2006. Turning
to the current account, India’s exports which were US$ 17.9 billion during 1991-92
increased to US$ 80.5 billion in 2004-05 and further to US$ 100.7 billion in
2005-06. Invisibles, such as, private remittances have also contributed significantly
to the current account. Net invisibles inflows increased from US$ 1.6 billion
in 1991-92 to US$ 31.2 billion in 2004-05 and further to US$ 40.9 billion in
2005-06. India’s current account balance which was in deficit at 3.1 per cent
of GDP in 1990-91 turned into a surplus of 0.7 per cent in 2002-03. A surplus
of US $ 14.1 billion was posted in the current account during the financial
year 2003-04, driven mainly by the surplus in the invisibles account. However,
this was not sustained during 2004-05, with the current account posting a deficit
of US$ 5.4 billion, driven mainly by the surge in oil prices in the international
market. During 2005-06, current account deficit widened further and was of the
order of US$ 10.6 billion, driven mainly by strong import demand, both oil and
non-oil.
4. External Liabilities vis-à-vis
Foreign Exchange Reserves
The accretion of foreign exchange
reserves needs to be seen in the light of total external liabilities of the
country.
India’s International
Investment Position (IIP), which is a summary record of the stock of country’s
external financial assets and liabilities, is available as of March 2005 (Table
4).
Table 4: International Investment
Position of India
|
|
(US $ million)
|
|
Item
|
March 2005 P
|
A
|
Assets
|
|
1.
|
Direct investment abroad
|
9,568
|
2.
|
Portfolio investment
|
806
|
3.
|
Other investments
|
17,367
|
4.
|
Foreign Exchange Reserves
|
141,514
|
|
Total Foreign Assets
|
169,255
|
B
|
Liabilities
|
|
1.
|
Direct investment in India
|
44,511
|
2.
|
Portfolio investment
|
55,467
|
3.
|
Other investments
|
110,154
|
|
Total Foreign Liabilities
|
210,132
|
|
Net Foreign Liabilities (B-A)
|
40,877
|
P: Provisional
Source: Official website of Reserve Bank of India (http://www.rbi.org.in)
5. Prepayment/Repayment of external
debt
The significant increase in forex
reserves enabled prepayment of certain high-cost foreign currency loans of the
Government of India from the Asian Development Bank (ADB) and the World Bank
(IBRD) amounting to US$ 3.03 billion during February 2003. During 2003-04, prepayment
of certain high cost loans to IBRD and ADB amounting to US$ 2.6 billion was
carried out by the Government. Additionally, prepayment of bilateral loans amounting
to US$ 1.1 million was also made. Thus, the total quantum of prepayments was
of the order of US$ 3.7 billion during 2003-04. During 2004-05, prepayment of
bilateral loan to the tune of US$ 30.3 million was made. During 2005-06, no
prepayment of high-cost multilateral/bilateral loan was carried out.
6. Financial Transaction Plan (FTP)
of IMF
International Monetary Fund (IMF)
designated India as a creditor under its Financial Transaction Plan (FTP) in
February 2003, in terms of which India participated in the IMF’s financial support
to Burundi in March-May 2003, with a contribution of SDR 5 million and to Brazil
in June-September 2003 with SDR 350 million. In December 2003, SDR 43 million
was made available to Indonesia under FTP. During 2004-05, SDR 61 million was
made available under FTP to countries like Uruguay, Haiti, Dominican Republic
and Sri Lanka. During May-June 2005, SDR 34 million was made available to countries
like Turkey and Uruguay, Thus, the total quantum of India’s contribution under
FTP by way of purchase was SDR 493 million at end-March 2006. India has been
included in repurchase transactions of the FTP since November 2005. There have
been 5 transactions during the period from November 2005 to February 2006 totaling
SDR 466 million received from 3 countries, viz., Turkey, Algeria and Brazil.
7. Adequacy of Reserves
Adequacy of reserves has emerged
as an important parameter in gauging its ability to absorb external shocks.
With the changing profile of capital flows, the traditional approach of assessing
reserve adequacy in terms of import cover has been broadened to include a number
of parameters which take into account the size, composition and risk profiles
of various types of capital flows as well as the types of external shocks to
which the economy is vulnerable. The High Level Committee on Balance of Payments,
which was chaired by Dr. C. Rangarajan, erstwhile Governor of Reserve Bank of
India, had suggested that, while determining the adequacy of reserves, due attention
should be paid to payment obligations, in addition to the traditional measure
of import cover of 3 to 4 months. In 1997, the Report of Committee on Capital
Account Convertibility under the chairmanship of Mr.S.S.Tarapore suggested four
alternative measures of adequacy of reserves which, in addition to trade- based
indicators, also included money-based and debt-based indicators.
In the more recent period, assessment
of reserve adequacy has been influenced by the introduction of new measures
that are particularly relevant for emerging market countries like India. One
such measure requires that the usable foreign exchange reserves should exceed
scheduled amortisation of foreign currency debts (assuming no rollovers) during
the following year. The other one is based on a 'Liquidity at Risk' rule that
takes into account the foreseeable risks that a country could face. This approach
requires that a country's foreign exchange liquidity position could be calculated
under a range of possible outcomes for relevant financial variables, such as,
exchange rates, commodity prices, credit spreads etc.. Reserve Bank of India
has done exercises based on intuition and risk models in order to estimate 'Liquidity
at Risk (LAR)' of the reserves.
The traditional trade-based indicator
of reserve adequacy, viz, import cover of reserves, which fell to a low of 3
weeks of imports at end-December 1990, rose to 11.5 months of imports at end-March
2002 and increased further to 14.2 months of imports or about five years of
debt servicing at end-march 2003. At end-March 2004, the import cover of reserves
was 17.0 months, which came down to 14.3 months as at end-March 2005 and further
to 11.6 months as at end-March 2006. The ratio of short-term debt to foreign
exchange reserves declined from 146.5 per cent at end-March 1991 to 4.2 per
cent at end-March 2004 but increased slightly to 5.3 per cent as at end-March
2005 and further to 7.0 per cent as at end-March 2006. Similarly, the ratio
of volatile capital flows (defined to include cumulative portfolio inflows and
short-term debt) to reserves declined from 146.6 per cent as at end-March 1991
to 35.2 per cent as at end-March 2004. However, this ratio increased moderately
to 36.6 per cent as at end-March 2005 and further to 43.2 per cent as at end-March
2006.
8. Investment Pattern and Earnings
from Foreign Exchange Reserves
The foreign exchange reserves are
invested in multi-currency, multi-asset portfolios as per the existing norms,
which are similar to international practices in this regard. As at end-March,
2006, out of the total foreign currency assets of US$ 145.1 billion, US$ 35.2
billion was invested in securities, US $ 65.4 billion was deposited with other
central banks, BIS & IMF and US$ 44.5 billion was in the form of deposits
with foreign commercial banks. (Table 5)
Table 5: Deployment Pattern of Foreign
Exchange Reserves
|
|
(US $ Million)
|
|
As on March 31, 2006
|
As on March 31, 2005
|
(1) Foreign Currency Assets
|
145,108
|
135,571
|
(a)Securities
|
35,172
|
36,819
|
(b) Deposits with other central banks,
BIS & IMF
|
65,399
|
65,127
|
(c) Deposits with foreign commercial banks
|
44,537
|
33,625
|
(2) Special Drawing Rights
|
3
|
5
|
(3) Gold (including gold deposits)
|
5,755
|
4,500
|
(4) Reserve Tranche Position
|
756
|
1,438
|
(5) Total Foreign Exchange Reserves
|
151,622
|
141,514
|
During the year 2004-05 (July-June),
the return on foreign currency assets and gold, after accounting for depreciation,
increased to 3.1 per cent from 2.1 per cent during 2003-04, mainly because of
the rise in short-term interest rates in the USA and lower mark-to-market depreciation
on securities.
|