Forex Reserves

  • GS Paper – 3, Mobilization of Resources, Growth & Development

Why is it in the news?

  • Indian Foreign Exchange (Forex) reserves fell by USD 678 million for the week ending January 21, 2022, according to statistics from the Reserve Bank of India (RBI). India’s total Foreign Exchange (Forex) reserves now total USD 634.287 billion.
  • The decline in the Foreign Currency Assets (FCA), which is a critical component of the overall reserves, was the cause of the decline in the reserves. During the reporting week, FCA decreased by USD 1.155 billion, bringing the total to USD 569.582 billion.
  • During the week under review, gold reserves increased by USD 567 million, bringing them to USD 40.337 billion.
  • A USD 68 million decrease in Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) brought the total to USD 19.152 billion.

The Most Important Points

Reserves of foreign currency (foreign exchange reserves):

  • Treasury bills and other government securities are examples of assets kept on reserve by a central bank in foreign currencies. These assets include bonds, treasury bills, and other types of government securities.
  • It should be mentioned that the majority of the world’s foreign currency reserves are stored in US dollars.

India’s foreign exchange reserves consist of the following:

  • Assets denominated in a foreign currency
  • Reserves of gold
  • Drawing Rights with Exceptions
  • The International Monetary Fund maintains a reserve position (IMF).

The following are the objectives of holding foreign exchange reserves:

  • Providing support for and preserving trust in monetary and exchange rate management strategies is essential.
  • The ability to intervene in favour of the national or union currency is provided by this feature.
  • This strategy reduces external vulnerability by ensuring that foreign currency liquidity is available to absorb shocks during times of crisis or when access to credit is restricted.

The Importance of Growing Foreign Exchange Reserves:

  • The government is in a comfortable position as the country’s foreign exchange reserves continue to grow, allowing the government and the Reserve Bank of India to better manage India’s external and domestic financial challenges.
  • Managing Crisis: It acts as a safety net in the case of an economic crisis affecting the Balance of Payments (BoP).
  • Appreciation of the rupee: The increase in reserves has also assisted in the strengthening of the rupee against the dollar.
  • Boosting Market Confidence: Reserves will instil a level of confidence in the markets and investors that a government will be able to satisfy its external debt commitments.

Foreign Currency Assets

  • FCAs are assets that are valued in a currency other than the country’s own currency, as opposed to the country’s own currency.
  • FCA accounts for the majority of the currency reserve’s value. It is expressed in terms of dollars and cents
  • The FCAs take into account the effect of appreciation or depreciation of non-US units such as the euro, the pound, and the yen that are kept in the international reserves.
  • Drawing Rights with Exceptions
  • The SDR is an international reserve asset that was formed by the International Monetary Fund (IMF) in 1969 to complement the official reserves of its member countries.
  • The Special Drawing Right (SDR) is neither a currency nor a claim on the IMF. As a result, it has the ability to assert a claim on the freely useable currencies of IMF members. SDRs can be exchanged for these currencies at the current exchange rate.
  • SDR’s value is computed using a weighted basket of major currencies, including the US dollar, the euro, the Japanese yen, the Chinese yuan, and the British pound, to arrive at its current value.
  • The interest rate on SDRs, often known as the SDR interest rate (SDRi), is the interest rate paid to members on their SDR holdings.
  • The International Monetary Fund (IMF) has allocated SDR 12.57 billion (equal to about USD 17.86 billion) to India. India’s entire SDR holdings now total SDR 13.66 billion, according to the latest available data.
  • In the International Monetary Fund, there is a reserve position.
  • A reserve tranche position refers to a portion of the needed quota of currency that each member nation must send to the IMF that can be used for internal reasons by the country holding the reserve tranche position.
  • The reserve tranche may be thought of as an emergency account that IMF members can access at any moment without having to agree to any restrictions or paying a fee for the privilege of doing so.


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