Skip to content

Advocatetanmoy Law Library

Legal Database

United States Code

  • Title 1. General Provisions
  • Title 2. The Congress
  • Title 3. The President
  • Title 4. Flag and Seal, Seat of Government, and the States
  • Title 5. Government Organization and Employees
  • Title 6. Domestic Security
  • Title 7. Agriculture
  • Title 8. Aliens and Nationality
  • Title 9. Arbitration
  • Title 10. Armed Forces
  • Title 11. Bankruptcy
  • Title 12. Banks and Banking
  • Title 13. Census
  • Title 14. Coast Guard
  • Title 15. Commerce and Trade
  • Title 16. Conservation
  • Title 17. Copyrights
  • Title 18. Crimes and Criminal Procedure
  • Title 19. Customs Duties
  • Title 20. Education
  • Title 21. Food and Drugs
  • Title 22. Foreign Relations and Intercourse
  • Title 23. Highways
  • Title 24. Hospitals and Asylums
  • Title 25. Indians
  • Title 26. Internal Revenue Code
  • Title 27. Intoxicating Liquors
  • Title 28. Judiciary and Judicial Procedure
  • Title 29. Labor
  • Title 30. Mineral Lands and Mining
  • Title 31. Money and Finance
  • Title 32. National Guard
  • Title 33. Navigation and Navigable Waters
  • Title 35. Patents
  • Title 36. Patriotic and National Observances, Ceremonies, and Organizations
  • Title 37. Pay and Allowances of the Uniformed Services
  • Title 38. Veterans' Benefits
  • Title 39. Postal Service
  • Title 40. Public Buildings, Property, and Works
  • Title 41. Public Contracts
  • Title 42. The Public Health and Welfare
  • Title 43. Public Lands
  • Title 44. Public Printing and Documents
  • Title 45. Railroads
  • Title 46. Shipping
  • Title 47. Telecommunications
  • Title 48. Territories and Insular Possessions
  • Title 49. Transportation
  • Title 50. War and National Defense
  • Title 51. National and Commercial Space Programs
  • Title 52. Voting and Elections
  • Title 54. National Park Service and Related Programs

Read More

  • Home
    • About
  • UPDATES
  • Courts
  • Constitutions
  • Law Exam
  • Pleading
  • Indian Law
  • Notifications
  • Glossary
  • Account
  • Home
  • 2022
  • February
  • 20
  • Legal framework of foreign exchange reserve management in India
  • BANKING

Legal framework of foreign exchange reserve management in India

The Reserve Bank of India publishes half-yearly reports on management of foreign exchange reserves as part of its efforts towards enhanced transparency and levels of disclosure. These reports are prepared half yearly with reference to the position as at end-March and end-September each year. The present report (37th in the series) is with reference to the position as at end-September 2021.
6 min read
Print Friendly, PDF & Email

The Reserve Bank of India publishes half-yearly reports on management of foreign exchange reserves as part of its efforts towards enhanced transparency and levels of disclosure. These reports are prepared half yearly with reference to the position as at end-March and end-September each year. The present report (37th in the series) is with reference to the position as at end-September 2021.

RBI Report on Management of Foreign Exchange Reserves–Oct 27, 2021

Law

1. Objectives of Reserve Management

The guiding objectives of foreign exchange reserve management in India are similar to those of many central banks in the world. The demands placed on the foreign exchange reserves may vary widely depending upon a variety of factors including the exchange rate regime adopted by the country, the extent of openness of the economy, the size of the external sector in a country’s GDP and the nature of markets operating in the country. While safety and liquidity constitute the twin objectives of reserve management in India, return optimization is kept in view within this framework.

2. Legal Framework and Policies

The Reserve Bank of India Act, 1934 provides the overarching legal framework for deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties. The essential legal framework for reserve management is provided in sub-sections 17(6A), 17(12), 17(12A), 17(13) and 33 (6) of the above Act. In brief, the law broadly permits the following investment categories:

deposits with other central banks and the BIS;

deposits with commercial banks overseas;

debt instruments representing sovereign/sovereign-guaranteed liability with residual maturity for the debt papers not exceeding 10 years;

other instruments / institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act; and dealing in certain types of derivatives.

3 Risk Management

The broad strategy for reserve management including currency composition and investment policy is decided in consultation with the Government of India. The risk management functions are aimed at ensuring development of sound governance structure in line with the best international practices, improved accountability, a culture of risk awareness across all operations, efficient allocation of resources and development of in-house skills and expertise. The risks attendant on deployment of reserves, viz., credit risk, market risk, liquidity risk and operational risk and the systems employed to manage these risks are detailed in the following paragraphs.

3.1 Credit Risk

The Reserve Bank is sensitive to the credit risk it faces on account of the investment of foreign exchange reserves in the international markets. The Reserve Bank’s investments in bonds/treasury bills represent debt obligations of highly rated sovereigns, central banks and supranational entities. Further, deposits are placed with central banks, the BIS and commercial banks overseas. RBI has framed requisite guidelines for selection of issuers/ counterparties with a view to enhancing the safety and liquidity aspects of the reserves. The Reserve Bank continues to apply stringent criteria for selection of counterparties. Credit exposure vis-à-vis sanctioned limit in respect of approved counterparties is monitored continuously. Developments regarding counterparties are constantly under watch. The basic objective of such an on-going exercise is to assess whether any counterparty’s credit quality is under potential threat.

3.2 Market Risk

Market risk for a multi-currency portfolio represents the potential change in valuations that result from movements in financial market prices, for example, changes in interest rates, foreign exchange rates, equity prices and commodity prices. The major sources of market risk for central banks are currency risk, interest rate risk and movement in gold prices. Gains/losses on valuation of FCA and gold due to movements in the exchange rates and/or price of gold are booked under a balance sheet head named the Currency and Gold Revaluation Account (CGRA). The balances in CGRA provide a buffer against exchange rate/gold price fluctuations. The dated foreign securities are valued at market prices as on the last business day of each week and month and the appreciation/depreciation arising therefrom is transferred to the Investment Revaluation Account (IRA). The balance in IRA is meant to provide cushion against changes in the security prices over the holding period.

3.2.1 Currency Risk

Currency risk arises due to movements in the exchange rates. Decisions are taken on the long-term exposure to different currencies, depending on the likely movements in exchange rates and other considerations in the medium and long-term. The decision making procedure is supported by reviews of the strategy on a regular basis.

3.2.2 Interest Rate Risk

The crucial aspect of the management of interest rate risk is to protect the value of the investments as much as possible from adverse impact of interest rate movements. The interest rate sensitivity of the portfolio is identified in terms of the benchmark duration and the permitted deviation from the benchmark.

3.2.3 Liquidity Risk

Liquidity risk involves the risk of not being able to sell an instrument or close a position when required without facing significant costs. The reserves need to have a high level of liquidity at all times in order to be able to meet any unforeseen and emergency needs. Any adverse development on the external front would pose a demand on our forex reserves and, hence, the investment strategy needs a highly liquid portfolio. The choice of instruments determines the liquidity of the portfolio. For example, in some markets, treasury securities could be liquidated in large volumes without much distortion of the price in the market and, thus, can be considered as liquid. Except fixed deposits with the BIS/ commercial banks overseas / central banks and securities issued by supranationals, almost all other types of investments are highly liquid instruments which could be converted into cash at short notice. The Reserve Bank closely monitors the portion of the reserves, which could be converted into cash at a very short notice, to meet any unforeseen/ emergency needs.

3.3 Operational Risk and Control System

In tune with the global trend, close attention is paid to strengthen the operational risk control arrangements. Key operational procedures are documented. Internally, there is total separation of the front office and the back office functions and the internal control systems ensure several checks at the stages of deal capture, deal processing and settlement. The deal processing and settlement system, including generation of payment instructions, is also subject to internal control guidelines. There is a system of concurrent audit for monitoring compliance in respect of the internal control guidelines. Further, reconciliation of accounts is done regularly. In addition to internal audit and independent monitoring, the financial accounts are audited by external statutory auditors. There is a comprehensive reporting mechanism covering significant areas of activity/ operations relating to reserve management. These are provided to the senior management periodically, at frequent intervals, depending on the type and sensitivity of information. The Reserve Bank uses SWIFT as the messaging platform to settle its trades and send financial messages to its counterparties, custodians of securities and other business partners. International best practices with respect to usage and security of SWIFT system are followed. All the necessary upgrades were timely implemented in the SWIFT Alliance Access system along with strict compliance with all the mandatory security control measures as recommended by SWIFT.

4 Transparency and Disclosures

The Reserve Bank has been making available in the public domain data relating to Foreign Exchange Reserves, its operations in foreign exchange market, position of the country’s external assets and liabilities and earnings from deployment of Foreign Currency Assets and gold through periodic press releases of its Weekly Statistical Supplements, Monthly Bulletins, Annual Reports, etc. The Reserve Bank’s approach with regard to transparency and disclosure closely follows international best practices in this regard. The Reserve Bank has adopted the Special Data Dissemination Standards (SDDS) template of the IMF for publication of the detailed data on Foreign Exchange Reserves. Such data are made available on monthly basis on the Reserve Bank’s website.


Related

Tags: Foreign Exchange Legal framework RBI

Continue Reading

Previous: RBI Framework on Analysis of Balance Sheets (BSA)
Next: Agreement Establishing the Asian Clearing Union (ACU)-1974

Indian Supreme Court Digest

  • Unexplained inordinate delay must be taken into consideration as a very crucial factor and ground for quashing a criminal complaint (SC-18/05/2023)
  • For passing order u/s 319 CrPC, ‘satisfaction’ as mentioned in para no106 of Hardeep Singh case is sufficient (SC-2/06/2023)
  • ISKCON leaders, engage themselves into frivolous litigations and use court proceedings as a platform to settle their personal scores-(SC-18/05/2023)
  • High Court would not interfere by a Revision against a decree or order u/s 6 of SRA if there is no exceptional case (SC-2/4/2004)
  • Borrower may file a counterclaim either before DRT in a proceeding filed by Bank under RDB Act or a Civil Suit under CPC-SC (10/11/2022)

Write A Guest Post

Current Posts

Unexplained inordinate delay must be taken into consideration as a very crucial factor and ground for quashing a criminal complaint (SC-18/05/2023)
15 min read
  • Criminal Procedure Code 1973

Unexplained inordinate delay must be taken into consideration as a very crucial factor and ground for quashing a criminal complaint (SC-18/05/2023)

For passing order u/s 319 CrPC, ‘satisfaction’ as mentioned in para no106 of Hardeep Singh case is sufficient (SC-2/06/2023)
8 min read
  • Criminal Procedure Code 1973

For passing order u/s 319 CrPC, ‘satisfaction’ as mentioned in para no106 of Hardeep Singh case is sufficient (SC-2/06/2023)

Ghanshyam Vs Yogendra Rathi (02/06/2023)
8 min read
  • Supreme Court Judgments

Ghanshyam Vs Yogendra Rathi (02/06/2023)

Indian Lok Sabha Debates on The Railways Budget 2014-15 (10/06/2014)
198 min read
  • Indian Parliament

Indian Lok Sabha Debates on The Railways Budget 2014-15 (10/06/2014)

  • DATABASE
  • INDEX
  • JUDGMENTS
  • CONTACT US
  • DISCLAIMERS
  • RSS
  • PRIVACY
  • ACCOUNT
Copyright by Advocatetanmoy.
 

Loading Comments...
 

You must be logged in to post a comment.