Reserve managers can cope with the low-return environment by increasing the duration of their portfolios, investing in new asset classes, new markets and more active management of their gold stocks, as recommended. from an article in the last monthly bulletin of the Reserve Bank of India. .
In light of the likely persistence of various structural reasons for low returns, it is imperative that reserve managers move beyond traditional reserve management approaches to maintain and improve returns, RBI officials Ashish Saurabh stressed. and Nitin Madan in the article.
The authors observed that the first and foremost way to tackle the low yield environment to increase yield would be to increase portfolio duration.
âCountries with adequate reserves have sufficient cushion to take more duration risk. Increasing the duration of the portfolio is the easiest and most immediate measure that can be taken to improve the return by a few basis points, âthey said, adding that this should be combined with an increase in investments in maturities. longer.
Investment in new products / asset classes
Officials have suggested investing in new asset classes involving investing in products beyond traditional investment avenues. They noted that some products may be new in nature as surveys and anecdotal evidence do not suggest the use of these products by reserve managers.
In this regard, the authors have referred to the use of investment products / asset classes such as foreign exchange (FX) swaps; repo transactions; double currency deposits; equity index funds; and increase the portfolio’s credit risk.
Active gold management
The authors believe that active management of gold can generate a decent return for central banks beyond capital gains. Some of the avenues for active management of gold include gold deposits, gold swaps, and gold exchange traded funds (ETFs).
Central banks hold nearly 35,000 tonnes of gold (World Gold Council estimate), which represents about 17% of the aerial stocks available in the world.
Investing in new markets
RBI officials pointed out that some countries are relatively stable financially, are well rated and offer better returns than some of the G7 countries. Although these countries do not have very deep sovereign bond markets, they felt that a reserve manager could invest a small portion of their reserves in these markets and generate that additional return.
Another way to generate a higher return is to lower the credit rating requirement and invest in emerging markets which offer a higher return.
âThis, however, implies a higher exposure to currency risk as their currencies can be volatile. To mitigate this, reserve managers might consider investing in the US / Euro denominated debt of these countries,â Saurabh said. and Madan.
The different options by which a reserve manager could invest in these markets are direct investments; passive funds; AND F; Funds managed separately / Custom funds / ETF; and total return swaps.
The authors observed that the choice of investment strategy, however, should be tailored according to the risk appetite, investment priorities, skills and operational capacities of individual institutions.
The Reserve Bank of India Act, 1934 provides the overall legal framework for the deployment of reserves in various foreign currency and gold assets in the broad parameters of currencies, instruments, issuers and counterparties.
Currently, the law broadly permits the deployment of reserves in investment categories such as deposits with other central banks and the BIS; deposits with commercial banks abroad; debt securities representing a sovereign commitment / guaranteed by the sovereign with a residual maturity for debt securities not exceeding 10 years; other instruments / institutions approved by the RBI Central Council; and trading in certain types of derivative instruments.