Investing Foreign Exchange Reserves In Stocks May Drive Higher Returns: RBI Report
Investing India’s growing foreign exchange reserves in equity funds, especially index funds, may generate higher returns, as interest rates, which have been on a downward trajectory for the past four years. decades in advanced economies have hit all-time lows, the Reserve Bank of India (RBI) said the report.
âInvesting in stocks is considered risky, especially for a central bank, which is responsible for safeguarding reserves. However, investing a small portion of reserves in an index fund has the potential to increase portfolio returns, âsaid an RBI report onâ The Low Return Environment and Forex Reserve Management â. Total foreign exchange reserves stood at $ 639.51 billion as of October 8, 2021. Investing in the S&P 500 through various economic cycles and financial booms and recessions reveals that the CAGR returns in 5 years, 10 years, 15 years, 20 years, 25 years and 30 years would have been 13.3%, 11.1%, 7.3%, 5.4%, 7.4% and 8.5%, respectively, a- he declares.
“This implies that if it is held for a long to very long time, despite the volatility in the meantime, it can not only preserve capital, but also generate a much higher return than most investments,” the report says. . Moreover, in May, the RBI raised the red flag on the issue of a “bubble” in the stock markets. “This order of asset price inflation against the backdrop of the estimated 8% GDP contraction in 2020-2021 poses the risk of a bubble,” the RBI said in its annual report for 2020-2021. On August 22, 2020, RBI Governor Shaktikanta Das said there was a marked lag between the sharp rise in the markets and the state of the real economy, as excess global liquidity pushed up the prices of active all over the world.
In a recent interaction with Indian express and Financial Times, Das had said: âGlobally there is excess liquidity and stock prices are very high and are booming in almost every market including Indiaâ¦ But I wanted to mention that there is no evidence of high asset prices, i.e. high stock prices, fueling general inflation or general prices.
âThere is no evidence to show that high liquidity is fueling general prices,â Das said. The Sensex hit new highs and broke through the 62,000 level during intraday trading on Tuesday. Stock markets in emerging market economies (EMEs) were rocked in August by China’s regulatory crackdown and continued to decline in September due to concerns about China and the shift in monetary policy stance of several EAs. Stock markets in EMEs like India and Russia, however, hit all-time highs in September and continued to advance in October.
At the end of March 2021, out of a total of foreign currency assets of $ 536.69 billion, $ 359.88 billion was invested in securities, $ 153.39 billion was deposited with other central banks and the BIS and the balance of $ 23.43 billion consisted of deposits with commercial banks abroad. All of these avenues carry very low interest rates. Gold reserves were worth $ 38 billion.
âThe performance of S&P 500 equity index funds is comparable to that of gold over a long period of time,â he said. A number of central banks are increasingly investing in stocks of one form or another. The Swiss National Bank, for example, invests 20 percent of its reserves in equities. In addition, regional governments in major advanced economies issue bonds that in many countries carry the implied sovereign guarantee, according to the RBI report.
âThey also offer a better yield than sovereigns. Reserve managers could invest a small percentage of their reserves in subnational debt securities in developed countries like Germany, Australia, Canada, etc. and US agency bonds, âhe said. Likewise, even the highest rated supranational agencies report better than sovereigns in most cases. If reserve managers can move further down the credit curve, then they can earn even higher returns.
Reserve managers typically invest in well-rated sovereigns like G10 countries because they have deep bond markets and meet reserve managers’ criteria for safety and liquidity. However, some countries are relatively stable financially, are well rated and offer better returns than some G7 countries, according to the RBI report.