Central bank allows banks to partially invest in foreign countries

The central bank has opened up investment by class ‘A’ and ‘B’ financial institutions in foreign countries.

In line with the monetary policy, the central bank today has opened commercial banks and national level development banks a new area to invest 30 per cent of foreign currency deposits at their agency banks abroad in low risk instruments for a maximum of two years.

The circular states that banks can only deposit 25 per cent of their total foreign exchange liabilities in agency banks abroad. Moreover, banks have to maintain a minimum foreign exchange balance of $200,000 to meet payment necessities.

While introducing the monetary policy, the central bank had announced that banks with foreign currency in their agency banks abroad would be allowed to invest a part of their balance in minimum risk instruments, signalling a policy to open up the country’s capital account.

Banks can invest up to 30 per cent of their total balance in their agency banks in minimum risk instruments such as foreign government issued bonds, call deposits and certificate of deposit.

Banks will be able to make some money by investing instead of keeping their balance idle in foreign banks. However, banks cannot obtain loans from foreign banks for investment purposes.

Moreover, the central bank has also allowed banks to hedge the risk related with foreign exchange rate fluctuation through derivatives instruments provided banks keep enough foreign currency to cover their forwards exchange contract in their agency banks as deposits.

The banks are allowed to invest in derivatives such as forward, futures, options and swaps.