Forex Reserves of India

Context:

According to recent data from Reserve bank of india (RBI), India’s Foreign Exchange (Forex reserves) Reserves posted a decline of USD 678 million during the week ended 21^st January 2022 to reach USD 634.287 billion.

About Forex Reserve

• Foreign-exchange reserves, also called Forex reserves, are, in a strict sense, only foreign-currency deposits held by national central banks and monetary authorities (excluding gold)).
• However, in popular usage it also includes gold reserves, special drawing rights (SDRs) and International Monetary Fund (IMF) reserve position because this total figure, which is usually more accurately termed as official reserves or international reserves or official international reserves, is more readily available and also arguably more meaningful.
• These foreign-currency deposits are the financial assets of the central banks and monetary authorities that are held in different reserve currencies (e.g. the U.S. dollar, the Euro, the Japanese Yen, the Chinese Yuan (renminbi), the Swiss Franc and the Pound Sterling) and which are used to back its liabilities (e.g. the local currency issued and the various bank reserves deposited with the Central bank by the government or financial institutions).
• Before the end of the gold standard, gold was the preferred reserve currency.
• Some nations are converting foreign-exchange reserves into sovereign wealth funds, which can rival foreign-exchange reserves in size.

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.

Countries with the highest foreign reserves

Currently, China has the largest reserves followed by Japan and Switzerland. India has overtaken Russia to become the fourth largest country with foreign exchange reserves.

1. China – $3,349 Billion
2. Japan – $1,376 Billion
3. Switzerland – $1,074 Billion
4. India – $612.73 Billion
5. Russia – $597.40 Billion

Purpose of keeping foreign exchange reserves

1. To keep the value of their currencies at a fixed rate.
2. Countries with a floating exchange rate system use forex reserves to keep the value of their currency lower than the US Dollar.
3. To maintain liquidity in case of an economic crisis.
4. The central bank (RBI) supplies foreign currency to keep markets steady.
5. To ensure that a country meets its foreign obligations and liabilities.

Reasons for High Forex Reserves

• Rise in investment by foreign portfolio investors and increased foreign direct investments (FDIs). The sharp jump in reserves started with the Finance Ministry’s announcement in 2019, cutting corporate tax rates.
• Fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange.
• Dollar outflow from overseas remittances and foreign travels have fallen steeply.

Declining Forex Reserve in India: Key points

• The nation’s forex reserves has reached $634.287 billion against a lifetime high of $642.453 billion in the week ended September 3, 2021.
• Reason: One of the reasons of the decrease is the drop in the foreign currency assets (FCA), which forms a vital component of the overall reserves.
• FCA declined by $1.155 billion to $569.582 billion in the reporting week.
• FCA include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
• Interestingly, gold reserves saw an increase of $567 million to $40.337 billion during the same period.
• The Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) fell $68 million to $19.152 billion.

Initiatives taken by the government to increase forex

• To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
• Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
• Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s 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.
• Recently, the IMF has made an allocation of SDR 12.57 billion (equivalent to around USD 17.86 billion) to India. Now, the total SDR holdings of India stand at SDR 13.66 billion.

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.

Q). Which one of the following groups of items is included in India’s foreign-exchange reserves?

1. Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
2. Foreign-currency assets, gold holdings of the RBI and SDRs
3. Foreign-currency assets, loans from the World Bank and SDRs
4. Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

Source: Indian Express

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