Forex Reserves

Why in News

According to the recent data from the Reserve Bank of India, India’s Foreign Exchange (Forex) reserves declined by $113 million to $479.45 billion in the week to 24 April, 2020 due to a fall in foreign currency assets.

Key Points

  • Changes in forex reserves holdings.
    • The foreign currency assets (FCAs) decreased by $321 million to $441.56 billion.
    • Gold reserves rose by $221 million to $32.901 billion.
    • The special drawing rights with the International Monetary Fund (IMF) fell by $6 million to $1.42 billion.
    • The country’s reserve position with the IMF also was down by $8 million to $3.57 billion.
  • Earlier, the reserve had touched a life-time high of $487.23 billion in the week ended by 6 March, 2020.
  • During 2019-20, the country’s foreign exchange reserves rose by almost $62 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 Reserve include:

Foreign Currency Assets (FCA)

  • 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 (SDR)

  • 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 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: IE