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Thursday, March 15, 2012

Insights from the Economic Survey 2011–12-Balance of Payments

The newspaper editions of tomorrow and dayafter will be filled with analysis and insights as people try to decipher the numbers and read the tea leaves, for both the Economic Survey and the Union Budget. However, this blogpost aims to capture the nuggets mentioned in the 14 chapters of the budget(which I did read today!), and does not claim to be exhaustive given the huge data overload! Anyways, here goes for Chapter VI(normal text is from the survey, bold text is mine) which can be read at this link http://indiabudget.nic.in/es2011-12/echap-06.pdf
  1. RBI's return on foreign currency assets is very low even below 2%! Maybe this is a good return for global markets but we need a comprehensive risk adjusted return calculation like that done by Norges Bank for Norway's SWF , In line with the principles of preserving the long-term value of the reserves in terms of purchasing power, minimizing risk and volatility in returns, and maintaining liquidity-the RBI holds FCAs in major convertible currency instruments. These include deposits of other country central banks, BIS etc with residual maturity not exceeding 10 years, to provide a strong bias towards capital preservation and liquidity. The annualized rate of return, net of depreciation, on the multi-currency multi-asset portfolio of the RBI declined from 4.2 per cent in 2008-09 to 2.1 per cent in 2009-10 and further to 1.7 per cent in 2010-11.
  2. The currency breakup of the external borrowings is quite interesting, while sovereign debt is more SDR less USD, the private sector seems able to raise more rupee denominated external debt(hence the higher ratio)
  3. The survey presents various ratios to show that our debt is manageable, and contrasts it with other countries also.  India’s external debt has remained within manageable limits as indicated by the external debt to GDP ratio of 17.8 per cent and debt service ratio
    of 4.2 per cent in 2010-11. FX reserves/External Debt ratio of nearly 99% is supposed to be high, compared to other nations..

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