Gayatri NayakThe Reserve Bank of India (RBI) earned 52% more by deploying its reserves overseas in the June quarter thanks largely due to higher returns on treasury bonds and interest on deposits parked with other central banks. But rate cuts by the US Federal Reserve going ahead could trim these gains.
Income from reserve assets amounted to $4.1 billion during the June quarter, compared with $2.7 billion in the same period a year ago, showed the latest figures on the balance of payments.
“It could reflect higher returns on bonds (coupon payments) and deposits as the global rate cut cycle has just begun. The RBI’s forex reserves rose by $5.2bn in Q1FY25 (excluding revaluation change). The combination would support income on reserve assets,” said Gaura Sengupta, chief economist, IDFC Bank.
The central bank deploys its foreign currency assets mostly in bonds issued by top rate sovereigns- predominantly US government bonds and also as deposits with foreign central banks and multilateral agencies . A small portion is also parked with foreign commercial banks.
The RBI is also likely to have earned higher commission on dollar sales.
“Another possibility is the rise in gross dollar sales in Q1FY25 worth $49.1bn v/s $4bn in Q1FY24. The change in accounting norms a few years ago to historical cost accounting has supported profits from foreign exchange transactions,” said Sengupta. “As per our estimate the historical cost of dollar purchases is tracking at 65.8, which remains significantly lower than current USD/INR spot rate.”
From the central bank’s income and balance sheet perspective and the possibility of higher dividend payout, a lot of other factors are at play. One of them would be valuation gains and losses on various assets.
“The valuation change in FX reserve assets in June quarter was significantly higher than the same period last year primarily driven by higher gold prices which more than offset the valuation losses due to higher UST yields,” said an economist with a foreign bank. “The trend on valuation changes going forth would depend on gold prices as further downtick in UST yields is likely to be limited.”
“The front loaded impact is positive, as rates go down and gold prices go up. In the medium term though it can again lower returns for RBI on its foreign assets, so there is some trade off.” Rahul Bajoria, Head of India and ASEAN Economic Research, BofA Securities India
Going ahead, given that the Fed’s rate cut cycle has just begun, interest income on reserves holding is likely to be substantial this fiscal.
“Given that the rate cut cycle globally has just started, the income from coupon payments on bond holdings and interest on deposits will remain substantial in FY25. The historical cost accounting will continue to support profits on foreign exchange transactions,” said Sengupta.
