RBI's Overseas Earnings Grow 52% In June Quarter

The Reserve Bank of India (RBI) recorded a 52 per cent jump in income from its overseas reserve deployments during the June quarter of FY25, largely driven by higher returns on US treasury bonds and interest on deposits parked with other central banks. 

According to the central bank’s latest balance of payments data, income from reserve assets surged to USD 4.1 billion, up from USD 2.7 billion in the same quarter last year. This was attributed to higher global interest rates, boosting returns on the RBI's foreign currency investments, which primarily include US government bonds and deposits with other top-rated sovereign entities.

Analysts pointed to favorable conditions for the RBI’s earnings, with the recent upturn in interest rates boosting returns on bonds and deposits. However, as the US Federal Reserve begins its anticipated rate cut cycle, there are concerns that the future gains from these holdings could shrink. While the RBI’s foreign exchange reserves increased by USD 5.2 billion in the first quarter of FY25, excluding revaluation effects, a substantial portion of this income boost stemmed from gross dollar sales, which totaled USD 49.1 billion during the quarter, compared to just USD 4 billion in the same period last year.

The RBI’s shift to historical cost accounting for foreign exchange transactions has also played a role in bolstering profits, as the cost of past dollar purchases is significantly lower than current USD/INR exchange rates, providing a cushion against market volatility. Additionally, valuation changes in the central bank’s foreign exchange reserves, particularly due to higher gold prices, offset any losses from rising US Treasury yields. This trend helped maintain a positive balance, although economists caution that further declines in yields may limit future gains.

Despite these uncertainties, analysts believe that the RBI's income from its foreign reserves could remain strong in the near term. The ongoing global rate cut cycle is expected to support higher coupon payments on bond holdings and interest on foreign deposits throughout FY25. However, the medium-term outlook may see diminishing returns as interest rates globally continue to decline. The rise in gold prices could further influence the central bank’s earnings, with economists suggesting that future valuation gains will depend on the performance of both gold and bond yields.

The surge in earnings, combined with profits from foreign exchange transactions, could potentially lead to higher dividend payouts by the RBI. Still, the central bank will need to navigate a complex landscape of rate changes and valuation shifts to maintain robust returns on its foreign assets.