As per a report by Bank of America- Merrill Lynch, the Reserve Bank of India (RBI) will continue to buy dollars to increase the foreign exchange reserves to further support the country’s import cover.
The forex reserves decreased to $ 320.564 billion in the week to July 25, 2014 significantly lesser than the all-time high of $ 321 billion in September 2011.
As per the report:
- RBI is likely to continue increasing forex to protect against contagion.
- RBI needs to raise $ 80 billion to maintain the current import cover of 8 months by March 2016.
- In May and June 2014, the central bank had bought $ 28.3 billion of forex forwards.
- This completely covers RBI’s short outstanding forwards position including the $ 26 billion of FCNR-B (Foreign Currency Non-Repatriable) swaps.
- The government and the RBI are expected to launch another bulk forex scheme to further enhance foreign exchange reserves.
- The government could raise investment limit in government securities by another $ 5 billion to $ 30 billion, replacing the $ 5 billion reserved for sovereign wealth funds and others, within the overall FII debt investment limit of $ 81 billion to increase reserves.
- It may also exercise the option of listing government securities in a growing market bond index to raise $ 20-25 billion from benchmark funds that track that index.
The government could also issue sovereign bonds or quasi sovereigns to raise $ 5-8 billion capitalizing on the Modi government’s solid political mandate, to bolster the reserves.
S S Mundra (60) has taken charge as deputy governor Reserve Bank of India. As a deputy governor of the central bank, he will be responsible for banking supervision, currency management, financial stability and rural credit. The government has notified his appointment for a period of 3 years.
The veteran banker had begun his career as a probationary officer, and served for a short time at Union Bank of India, where he was executive director. In a rare move, he returned as the CMD of his parent bank (Bank of Baroda) and was seen as a surprise choice for the prestigous regulatory job. In fact, Mundra would have never been offered this post had it not been for K C Chakrabarty’s decision to resign before the end of his tenure as RBI deputy governor.
Now, RBI has four deputy governors– H R Khan, Urijit Patel, R Gandhi and S S Mundra.
RBI is planning to have one more deputy governor, but this will require a change in the rules of RBI. Till the time the changes in rules are made, the RBI has suggested the Government to appoint an Officer on Special Duty or Chief Operating Officer (COO) with the rank of a deputy governor. Government is yet to take a call on any of these proposals put forward by the RBI. Normally, an RBI deputy governor can be appointed for 5 years or till the age of 62, whichever is earlier. To be eligible for the post, a candidate needs to be less than 60 years of age while assuming charge.
The RBI will revert to the Multiple Price method for bond auctions on August 1, 2014, a year after it adopted the present method of Uniform Price.
On August 1, 2014, the central bank will auction a 10-year bond with a coupon rate of 8.40% for a notified amount of Rs 9,000 crore using this method. Two more bond auctions for a total of Rs 5,000 crore will be conducted on the same day.
Bond auctions could be classified as either Uniform Price-based or Multiple Price-based.
- In the Uniform Price-based, all successful bidders are required to pay for the allotted quantity of securities at the same rate, the auction cut-off one, irrespective of what they’d quoted.
- In a Multiple price auction, the successful bidders are required to pay for the allotted quantity at the respective price or yield at which they bid.
It was in June 2013 when RBI adopted the uniform price method, when bond yields were volatile, with foreign institutional investors leaving the domestic markets amid a dwindling currency. However, the macro fundamentals have improved since September2013, with the rupee stabilizing after recovering most of the losses. A new government at the Centre has reestablished hope among foreign investors. It is expected to speed up the opening to foreign investment and control the fiscal deficit. The fiscal deficit for the current financial year is targeted at 4.1% of GDP, as compared to 4.5% in 2013-14. The recent Union Budget set the target at 3.6% for 2015-16 and 3% for 2016-17.
Using a different method RBI would also be able to observe how the market reacts to different methods of auction.