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Showing posts from January, 2018

Making sense of RBI's capital buffers and dividends

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In the ongoing Indian government bond market soap opera, one subplot relates to RBI’s dividend payment to the government. After three years of paying out all of its net income as dividend, for fiscal year 2016-17 (FY17), the RBI board retained INR 131.9B of its income for its own books. Given current fiscal stress, this led to murmurs, including suggestions that RBI should now pay an ad-hoc dividend to the government. Any hasty roll back of this kind, without debate and consensus, would severely risk RBI’s credibility. That said, we do need to debate the appropriate level of capital buffers on RBI’s balance sheet. There has been work done on this – by the Subrahmanyam Group (1997), Usha Thorat Group (2004) and the Malegam Committee (2013). More needs to be done. Central Bank balance sheets and income statements can be tricky to grasp. In addition, this issue can excite touchy, ideological arguments about government credibility and RBI independence. This is not th

The Great INR Carry Trick

For a while, ignore the breathless headline that INR is at a 2.5 year high against the USD. Also ignore the valid counter-argument that looking at USDINR alone is misleading, and that INR actually weakened by 7% against the EUR the past year. Both statements are true, but tell us very little about the “right” value of INR.   Let’s instead take a look at the USD inflows that are adding to RBI’s growing FX reserves. A significant chunk of the inflows chase the prospect of better “carry” in INR, and are reversible. Though this is not acknowledged or debated enough, our monetary policy framework and RBI’s specific FX intervention methodology have played a role in making this “carry trade” attractive. Dollar, dollar everywhere… Over many quarters now, RBI has intervened and bought USD in FX markets. In fiscal year 2018 (FY18) till October 2017, RBI purchased over $17B in the spot market and over $20B in the forward market. What are the sources of this plentiful USD?