Derived from the recent data published by the Reserve Bank of India, it has been noted that there was a significant dip in India’s Foreign Exchange (Forex) reserves. In the week ending on 21st January 2022, the forex reserves posted a decrease of USD 678 million, bringing the total to USD 634.287 billion. A considerable part of this decline can be attributed primarily to a fall in the Foreign Currency Assets (FCA).
The FCA, an essential element of the overall reserves, saw a decline of USD 1.155 billion, landing at a total of USD 569.582 billion during the reported week. Despite this decline, gold reserves experienced an upswing, seeing an increase of USD 567 million to reach a new total of USD 40.337 billion. However, not all entities saw growth; the Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) experienced a fall of USD 68 million, bringing them to USD 19.152 billion.
India’s Forex Reserve: An Overview
Foreign exchange reserves are a collection of assets on reserve by a central bank in foreign currencies. These assets can include bonds, treasury bills, and other government securities. Most forex reserves worldwide are held in US dollars. India’s forex reserve comprises Foreign Currency Assets, gold reserves, Special Drawing Rights, and the Reserve position with the International Monetary Fund (IMF).
Purpose of Forex Reserves
The chief aims of holding forex reserves are to support and maintain confidence in the policies for monetary and exchange rate management. These reserves provide the capacity to intervene in support of the national or union currency. Moreover, they limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.
Positive Impact of Rising Forex Reserves
The augmentation of forex reserves aids the government and the RBI in managing India’s external and internal financial issues and serves as a safety net during a Balance of Payment (BoP) crisis on the economic front. Also, it contributes to the strengthening of the rupee against the dollar. An increased reserve level gives markets and investors added confidence that a country can meet its external obligations.
Foreign Currency Assets: A Closer Look
Foreign Currency Assets (FCAs) are assets valued based on a currency other than a country’s own currency. FCA, the largest component of the forex reserve, is expressed in dollar terms. These include the effects of appreciation or depreciation of non-US units like the euro, pound, and yen held in the forex reserves.
About Special Drawing Rights
The Special Drawing Rights (SDR), an international reserve asset created by the IMF in 1969, is meant to supplement member countries’ official reserves. The SDR is neither a currency nor a claim on the IMF, but a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies, with their value calculated from a weighted basket of major currencies.
India’s 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. This emergency account can be accessed by IMF members at any time without agreeing to conditions or paying a service fee.