Archive for January 11th, 2013

Adam Posen’s interesting views on BoJ Independence and Japanese economy…

January 11, 2013

Adam Posen (earlier at BoE MPC and now back in PIIE) shares his views on the topic (Part – I and Part-II).

Interestingly he says, new Japanese PM Shinzo Abe asking BoJ to stimulate economy is justified:


RBI’s new WSS format…

January 11, 2013

In Dec-12, RBI mentioned that both RBI WSS and Monthly Bulletin is likely to change. Both were to become more crisp and analytical from Jan-13 onwards.

The January 2013 Bulletin will release an advance indicative calendar of articles to be published during the course of the calendar year 2013. The Bulletin articles will also be more focussed and analytical, putting forth the views of the Reserve Bank’s research staff on varied issues. This would contribute further towards enhancing transparency. The size of the weekly Statistical Supplement will get reduced to a 4-page statement from the current 8-page with a view to making it crisp and analytically more informative.

It has always been the endeavour of the Reserve Bank to disseminate the information in a timely manner as widely as possible. In this pursuit, the Reserve Bank of India Monthly Bulletin and the Weekly Statistical Supplement (WSS) have a long and chequered history. While the Bulletin made its first appearance in January 1947, the weekly statement preceded the Bulletin providing, among others, the weekly statement of affairs of the Reserve Bank of the preceding Friday. With the passage of time, both these publications have undergone major changes in substance and form in tune with time and state of the economy.

Both the new WSS and MB are out.

First changes in WSS:

  • WSS has been shortened to 4 pages (from 8 pages) and excel tables to 14 tables (from 22).
  • There is a bit of reorganisation of tables like Reserve Money which was Table 8 in earlier WSS is now Table 7 and so on.
  • Some Tables like Table 1 (RBI B/S) and Forex (Table 2) remain the same.
  • Some new tables have been added like RBI’s liquidity operations (Table 8). Some have been merged
  • Some tables have been deleted (like Table 22). Most unfortunate bit is deletion of Table 22 which gave you RBI’s secondary market buying of G-Sec along with OMO purchased via announcement route.

So, there will be a bit of changes in my guides to RBI’s WSS ( part I and part II). I haven’t made the changes though. Overall, logic will obviously remain the same.

In RBI’s new MB, they have given a  indicative calendar of articles to come in next issues. I initially thought we will get some more analytical and conceptual stuff. But these are just the articles RBI econs takes out every year. Nothing really different.

So, overall not really happy with the changes. WSS has deleted some crucial tables like Table 22. It was really useful as in 2012-13, RBI had bought nearly 35,000 Cr via secondary market. This was huge..

Not even sure how an indicative calendar of articles is really useful. RBI can actually take a leaf from other Central bank MBs which balance the usual articles with some conceptual and topical articles as well.

How RBA manages its forex reserve assets?

January 11, 2013

Christian Vallence of RBA has this nice article on the topic. Hope to get something from RBI econs as well on similar lines.

The Reserve Bank of Australia holds and manages the nation’s foreign exchange reserve assets in order to meet its policy objectives. While Australia’s foreign exchange reserves are relatively modest by international standards, they nonetheless constitute a sizeable portion of the Bank’s balance sheet, and variations in the Australian dollar value of these reserves are usually the most volatile component of the Bank’s profit and loss statement. This article discusses some of the key decisions faced by the Bank in holding and managing Australia’s foreign exchange reserves, including the appropriate size of reserve holdings, the way in which they are acquired, and risk management strategies. Each of these decisions involves a trade-off between policy capacity, and financial costs and risks to the Bank’s balance sheet.

How does RBA acquire Forex assets?

There are three methods through which a central bank can acquire reserves (either singularly or in combination): by borrowing foreign currency directly, for example, by issuing foreign currency securities (either in the name of the central bank or with the central government acting as an intermediary); borrowing foreign currency through the foreign exchange swap or cross-currency swap markets; or purchasing reserves outright, by selling the domestic currency in exchange for foreign currency. Borrowing foreign currency generates a hedged foreign exchange position, while outright holdings leave a central bank unhedged. The different methods have different implications for the capacity of the central bank to intervene and manage its balance sheet risk.

RBI buys/sells via both the ways – purchasing reserves outright and through swap markets. In 2005-08, it was mostly buying forex reserves via outright purchase (extract data from RBI’s DBIE site. It is there in Monthly Bulletin data in Time Series Publications).

In 2011-12 and 212-13, as rupee was depreciating it first sold forex reserves in outright spot market. That led to tight liquidity. Then RBI shifted position in swap market and has been slowly unwinding the swap position. From $14.5 bn in Jul-12, the swap position has come to $13.5 bn.

Coming back to the note. Each of the three have their costs and benefits.

The Reserve Bank of Australia accrues (and replenishes) the majority of its reserves by selling Australian dollars over time, and by reinvesting the earnings on its foreign assets. This generates a net ‘long’ or unhedged position in foreign currency.

The Bank considers the insurance characteristics of unhedged holdings to be superior to those of borrowed reserves as unhedged reserves carry little or no refinancing risk, as many of the Bank’s liabilities – most notably banknotes – are effectively perpetual. Conversely, foreign currency liabilities that fund borrowed reserves must be rolled over or repaid when they mature.[4] A central bank that has intervened with borrowed reserves has entered into a ‘short’ foreign currency position, and may find rolling over or repaying its liabilities more costly if the depreciation of the domestic currency persists beyond the central bank’s refinancing horizon. If a central bank instead holds unhedged reserves then it may be able to wait for the exchange rate to move higher before replenishing reserves that had previously been drawn down. A central bank that borrows to fund reserves may also need to maintain a higher level of (gross) reserves to guard against this refinancing risk.


Superb. Helps connect the dots.

The author talks about carrying cost of reserves, impact on B/S and so on.

Though for RBA, one can apply the same ideas to RBI as well..

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