Foreign currency assets (FCAs) of Reserve Bank of India (RBI) increased by $53 million during the week ended May 22. Foreign exchange reserves thus jumped by $53 million to $28,719 million on May 22, with foreign currency assets being $25,522 million, gold $3,184 million and special drawing rights (SDR) $13 million.
In the current financial year foreign currency assets of the apex bank have declined by $453 million, value of gold held by it dipped by $207 million and SDR stock increased by $121 million.
There has been a decline in the foreign currency assets of the central bank with inflows coming down to a trickle. On the portfolio front, net investments by foreign institutional investors in the current fiscal has declined by $182.5 million till May 22.
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The fiscal position continues to be under strain despite the fact that the government has succeeded in reducing its recourse to ways and means advances (WMA) from RBI by Rs 1,093 crore during the week ended May 15.
While the recourse to WMA is well above the 75 per cent trigger limit of Rs 8,250 crore for fresh flotation of securities, it can be expected to decline. On May 8, the government had raised Rs 4,000 crore and this ensured a marginal reduction in WMA from Rs 11,000 crore on May 8. Subsequently on May 27 the government had raised another Rs 4,000 crore. There was devolvement at the RBI auction on May 27 to the tune of Rs 3,999.50 crore and this will increase the net RBI credit to the government. The net RBI credit to the government has increased by 10.7 per cent in the current fiscal by May 15 as against an increase of 3.1 per cent in the corresponding period in 1997-98.
This figure is expected to go up further following the devolvement and will push up the year-on-year growth in money supply. The year-on-year growth in money supply stood at 17.2 per cent on May 8. The central bank would find it difficult to rein in the growth in money supply by conducting open market operations because the appetite for banks has been satiated given the frequent auctions this year and the large gross borrowing of Rs 86,000 crore.
RBI is presently selling the 11.90 per cent 2007 in the market at a premium of 10 paise and there are no takers in the market. Aggressive open markets would also pose a problem because it would affect the response at subsequent auctions.
There are some who believe that a reduction in cash reserve ratio (CRR) is around the corner. But it should be borne in mind that the monetisation following the massive devolvement has a positive effect on liquidity and hence the apex bank need not reduce CRR. However, if the proceeds of the auction are used to retire the WMA, then the growth in money supply will be lower.