Forex Reserves

• 03 Jul 2021

Why in News

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.

• Increase in the Foreign Currency Assets (FCA) is the major component of overall reserves.

Key Points

• 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 International Monetary Fund (IMF).
• Objectives of Holding Forex Reserves:
  
  • Supporting and maintaining confidence in the policies for monetary and exchange rate management.
  • 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 (BoP) crisis on the economic front.
  • Rupee Appreciation: The rising reserves have also helped the rupee to strengthen against the dollar.
  • Confidence in 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 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 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: BS