Fx kitty effect: RBI to raise contingency reserve level

The Reserve Bank of India (RBI) is planning to raise the level of contingency reserve (CR) in the wake of rising foreign exchange assets in the country.

According to banking sources, the RBI's contingency reserve is proposed to be hiked from 12 per cent of total assets to 18 per cent. The decision is being taken against the backdrop of the growing foreign exchange reserves in the last few years which has given rise to unforeseen risks ranging from revaluation gains and losses to currency crises.

The contingency reserves will provide a cushion to deal with the unforeseen situations. Contingency reserves had been put into use once during the balance of payment crisis in 1991.

As per the latest annual report, since 1999-2000 total income of the Indian central bank from domestic sources has fallen by almost 66 per cent from Rs 15,446 crore to Rs 5,220 crore in 2003-04.

On the other hand, income from foreign currency assets has grown by 40 per cent from Rs 6,514 crore to Rs 9,103 crore. The balance in CR has increased from Rs 29,911 crore in 1999-2000 to Rs 56,218 crore in 2003-04.

Even as the foreign exchange resources have increased in the kitty, earnings from both forex and domestic resources have been on a decline. In foreign exchange, the decline has been mainly on account of lower money market interest rates in major countries and a fall in prices of securities.

The rate of earnings on foreign currency assets and gold after accounting for depreciation decreased from 3.1 per cent in 2003-03 to 2.1 per cent in 2003-04.

The decline in domestic income has been on account of reduction in profit from sale of rupee securities under open market operations (OMO) and booking of substantially higher depreciation in the value of rupee securities.

Moreover, monetary operations in liquidity adjustment facility is being done at a high cost.

As against 2.1 per cent earning on its foreign currency assets, the RBI offers 4.75 per cent to the banks for sucking out the excess liquidity from the system under reverse repo daily.