How is Official Foreign Reserves (OFR) accumulated by MAS? Does Reserves Management Government Securities (RMGS) change this process?
MAS accumulates foreign assets when implementing monetary policy via foreign exchange (FX) intervention operations. Foreign assets that MAS accumulates are known as OFR.
To dampen appreciation pressures on the SGD, MAS intervenes in the spot FX market by buying USD and selling SGD.
The buying of USD increases OFR, which are MAS assets.
The selling of SGD increases banks SGD deposits with MAS, which are MAS liabilities. These additional balances correspondingly increase the aggregate amount of SGD liquidity in the banking system.
Buy USD / Sell SGD
MAS sterilises its FX interventions through its money market operations, to restore an appropriate level of SGD liquidity in the banking system and keep the monetary base unchanged. This supports the smooth functioning of SGD markets, and facilitates the needed lending and borrowing activity for market discovery of interest rates.
MAS does so by withdrawing SGD liquidity using four instruments: direct borrowing, foreign exchange swaps, repurchase agreements on Singapore Government Securities, and issuance of MAS Bills.
For example, by issuing more MAS Bills than maturing (net issuance of MAS Bills), MAS can withdraw the additional SGD liquidity and restore banks SGD deposits with MAS to their original level.
Sterilisation is not a pre-requisite for FX intervention (or accumulation of OFR), but is subsequent to such intervention to support the smooth functioning of interest rate markets rather than the monetary policy target (which is the S$NEER).
Issuance of MAS Bills
With the introduction of RMGS, there is no change in MAS intervention and sterilisation operations.
MAS will subscribe for RMGS only after it has accumulated more OFR than what is needed to conduct monetary policy and support financial stability.
MAS decides the amount and timing of its OFR transfers to the Government, and hence its RMGS subscriptions.
For more information, please click here for a monograph on Monetary Policy Operations in Singapore.
Can’t find what you’re looking for?