According to the recent data from the Reserve bank of India, India’s Foreign Exchange (Forex) reserves surged by $ 5 billion to $ 609 billion in the week ended 25th June 2021.
An increase in the Foreign Currency Assets (FCA) is the major component of overall reserves.
Changes in forex reserves holdings:
- FCA rose by $ 4.7 billion to $ 566 billion.
- Gold reserves rose by $ 365 million to $ 36.296 billion.
- The special drawing rights (SDRs)with the International Monetary Fund (IMF) remained unchanged at $1.498 billion.
- The country’s reserve position with the IMF increased marginally by $ 1 million to $ 4.965 billion in the week.
Foreign Exchange Reserves:
- Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills, and other government securities.
- It needs to be noted that most foreign exchange reserves are held in US dollars.
India’s Forex Reserve include:
- Foreign Currency Assets
- Gold reserves
- Special Drawing Rights
- Reserve position with the IMF
Objectives of Holding Forex Reserves:
- Supporting and maintaining confidence in the policies for monetary and exchange rates.
- Provides the capacity to intervene in support of the national or union currency.
- Limits external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.
Significance of rising forex reserves:
- Comfortable Position for the Government: The rising forex reserves give comfort to the government and the RBI in managing India’s external and internal financial issues.
- Managing Crisis: It serves as a cushion in the event of a Balance of payment crisis on the economic front.
- Rupee Appreciation: The rising reserves have also helped the rupee to strengthen against the dollar.
- Confidence in the Market:Reserves will provide a level of confidence to markets and investors that a country can meet its external obligations.
Foreign Currency Assets
- FCAs are assets that are valued based on a currency other than the country’s own currency.
- FCA is the largest component of the forex reserve. It is expressed in dollar terms.
- The FCAs include the effect of appreciation or depreciation of non-US units like the euro, pound, and yen held in the foreign exchange reserves.
Special Drawing Rights
- The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
- The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
- The value of the SDR is calculated from a weighted basket of major currencies, including the US dollar, the euro, Japanese yen, Chinese yuan, and the British pound.
- The interest rate on SDRs or (SDR) is the interest paid to members on their SDR holdings.
Reserve Position in the International Monetary Fund
- A reserve tranche position implies a portion of the required quota of currency each member country must provide to the IMF that can be utilized for its own purposes.
- The reserve tranche is basically an emergency account that IMF members can access any time without agreeing to conditions or paying a service fee.