Forex Reserves

05 Jul 2021 Forex Reserves

Forex Reserves

Context:

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 25^th June 2021.

An increase in the Foreign Currency Assets (FCA) is the major component of overall reserves.

About:

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.

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Yojna IAS Current Affairs Team