RBI Simply Minting It
The Reserve Bank of India (RBI) India’s central bank booked a minimum gain of Rs 2000 crore or US$ 400 million profit on its dollar sales in the July to September 2008 quarter. The central bank also realised large gains on its US Treasuries during the same period as investors globally became skittish and started fleeing for the safe haven of US Government debt at exactly the same time the Federal Reserve began cutting interest rates.
The RBI has sold US$ 8.9 billion since July of this year, the beginning of its 2008-2009 accounting year. The rate at which the RBI sold dollars to the market ranged from between Rs 44 to Rs 48. A proportion of the dollars sold may have been at less than market value, as it sold dollars to the oil marketing companies who require dollars to purchase crude on international markets. The RBI does this through a repo transaction using oil bonds issued by the Government of India to these companies as security.
The dollars sold by the RBI come directly from its foreign exchange reserves, the central bank had amassed some US$ 70 billion (Rs 350,000 crore) in reserves during the 07-08 accounting period, purchasing dollars at a floating rate of between Rs 39 to 41.60. On the assumption that the RBI bought dollars at the most expensive rate, and sold dollars at the lowest possible rate, the central bank would have realised a minimum gain of Rs 2.4 per dollar. This would result in a profit of Rs 2,136 crore or US$ 427 million.
Central banks in their efforts to defend their currencies from depreciating rapidly usually end up having to sell their dollar holdings, and this usually results in the sale of foreign exchange reserves at a premium to their purchase price.
Contrastingly, central banks usually purchase dollars in an effort to control an appreciating currency, supplying additional local currency to the market which alleviates pressure on the domestic currency to appreciate and this is usually done in an effort to maintain stability so that exporters remain price competitive in dollar terms. Central bank intervention is not guided by profit motive.
The US dollar has appreciated rapidly against the Rupee, and was trading as low as Rs 42 as recently as the beginning of August. It now trades above Rs 50 to the dollar, which is a 14% gain in three months.
There is a fiscal cost associated with a ballooning foreign exchange reserve, as the Reserve Bank of India starts accumulating dollars it must sell Rupees, in order to control the money supply, it sells bonds which has the effect of mopping up excess Rupee liquidity in the market, as a result the Government of India must service this debt which adds to the fiscal deficit.
In the July to September quarter, the RBI also reduced the amount it held in short term US government debt or treasuries by US$ 2 billion from US$113 billion to US$ 111 billion almost certainly realising gains on that sale as treasuries rallied benefitting from a simultaneous flight to quality and the cutting of short term interest rates by the Federal Reserve.
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