RBI may be looking at changing its reserve management strategy

RBI may be looking at changing its reserve management strategy

RBI may be internally exploring shedding its traditional approach to foreign exchange reserve management amidst falling global yields adding to the fiscal costs of managing the reserves. A research paper by RBI economists suggests that the central bank should be more active in its forex assets management including looking beyond SDR currencies and active management of its gold reserves.

Global interest rates which have been on declining over the last four decades in advanced economies, touched their historic lows in 2020. "This low yield environment has made it an arduous task for the reserve managers to generate reasonable returns on their foreign assets" said a paper by Ashish Saurabh and Nitin Madan of RBI's department of External Investments and Operations.

" Reserve managers can deal with the low yield environment by increasing the duration of their portfolios, investing in new asset classes, new markets and more active management of their gold stocks" they said adding that the choice of strategy, however, would require to be tailored to suit the risk appetite, investment priorities, skill sets and operational capabilities of individual institutions.

In its latest annual report, the central bank said that its agenda for 2021-22 was to "Continue to explore new asset classes, new jurisdictions/ markets for deployment of foreign currency assets (FCA) for portfolio diversification and in the process tap advice from external experts, if required"