Forex Reserves

• 24 Oct 2020

Why in News

According to the Reserve Bank of India (RBI) data, the country’s foreign exchange (forex) reserves touched a lifetime high of USD 555.12 billion after it surged by USD 3.615 billion in the week ended 16^th October 2020.

Key Points

• Reason Behind the Increase:
  
  • The rise in total reserves was due to a sharp rise in Foreign Currency Assets (FCAs), a major component of the overall reserves.
  • FCA jumped by USD 3.539 billion to USD 512.322 billion.
• 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 U.S. dollars.
  • These assets serve many purposes but are most significantly held to ensure that the central bank has backup funds if the national currency rapidly devalues or becomes altogether insolvent.
  • India’s Forex Reserves include:
    
    • Foreign Currency Assets
    • Gold
    • Special Drawing Rights
    • Reserve position with the International Monetary Fund (IMF)

Foreign Currency Assets

• FCA 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.
• FCA includes the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
  
  • Currency appreciation refers to the increase in value of one currency relative to another in the forex markets.
  • Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
    
    • In a floating exchange rate system, market forces (based on demand and supply of a currency) determine the value of a currency.

Special Drawing Rights

• The SDR is an international reserve asset, created by the International Monetary Fund (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 U.S. dollar, the euro, Japanese yen, Chinese yuan, and British pound.
• The interest rate on SDRs or SDRi 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 International Monetary Fund (IMF) that can be utilized for its own purposes.
• The reserve tranche is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee.

Source: TH