The country has seen a surge in the rate of return from gross official reserves in 2011 despite a serious rundown of reserves to prop up the exchange rate in the face of a balance of payments crisis.
The average rate of return on reserves as at the end of 2011 was around 7.21 percent. Reserves stood at US$ 5,958 million at the end of the year and returns from investments amounted to US$ 430 million.
The reserves position was stronger at the end of 2010 at US$ 6,610 million where returns amounted to US$ 338 million giving an average rate of return of 5.11percent.
By mid 2011, reserves stood at the highest position at US$ 8.1 billion before the Central Bank began selling dollars in the foreign exchange market to prop up the rupee in the face of a rapidly expanding trade deficit fuelled by higher-than-anticipated private sector credit growth.
Since February, the Central Bank has stopped intervening in the foreign exchange market and has raised monetary policy rates to curb the growth of credit. The rupee has depreciated nearly 12 percent since then.
Yesterday (22), the rupee gained slightly with exporters seen converting their dollar holdings, currency dealers said. The rupee closed at Rs. 129.70/80 against the greenback from an opening position of Rs. 129.90/130.10.
Central Bank Governor Ajith Nivard Cabraal yesterday told Reuters that the recent policy measures would help bring the rupee to below Rs. 125 against the dollar.
As these pages reported earlier this month, Treasury Secretary Dr. P. B. Jayasundera said the rupee should settle around this same level. He criticized speculators for influencing the exchange rate and said authorities were ready to intervene if necessary.
Since reserves peaked at US$ 8.1 billion in June 2011, the Central Bank had sold nearly US$ 3 billion to defend the exchange rate which also put the IMF programme on hold, and recommenced this year after the Central Bank announced its policy reversals.
The bank has been criticized for acting too late, which has meant that the adjustments are felt more acutely by the people. However, several analysts including the IMF believe that these measures would place the country on a more sustainable growth trajectory.