The main objective of maintaining the forex reserves is not getting higher yields, but insulating the economy from any sort of vulnerabilities and shocks, said Shyamala Gopinath, who retired yesterday as the Reserve Bank of India (RBI) Deputy Governor. "Ensuring the safety of the economy and liquidity in the system are the top priorities of the forex reserves management, and the return from them is only secondary. We cannot sacrifice our safety and liquidity just because we can get higher returns," Gopinath, who left the Mint Road office after 39 years of service, told PTI in her exit interview. "We got to operate within the framework of safety and liquidity of our system and return comes later," said the former RBI Deputy Governor, who was in charge of the Forex Management Department. Further buttressing her point, she said, "There is no assurance that we will get an assured return in a particular period. There is no instrument that fully protects our capital and at the same time offers an assured high return." The return on forex reserves more than halved to 2.09% in the fiscal year ended June 2010, which if adjusted against current inflation, was a negative return on the asset. The RBI could earn only Rs 27,000 crore as interest yield from its nearly $300 billion forex reserves during the period. But if RBI chose to deploy these funds locally, it would have fetched nearly five times more, or a whopping Rs 1,35,000 crore, at the prevailing interest rates. This happened so because RBI has chosen to invest the money in foreign markets/assets and not in the domestic market/assets. However, it should be noted that RBI could not have done otherwise under the prevailing rules governing the forex management.
BS
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