The most recent data from the Reserve Bank of India (RBI) indicates a decline in India’s Foreign Exchange (Forex) reserves. With a fall of $113 million, the current Forex reserves stand at $479.45 billion for the week ending 24th April 2020. This change is attributed to a decrease in foreign currency assets.
Alterations in Forex Reserves Holdings
The RBI data outlines the following variations in the Forex reserves holdings: the foreign currency assets (FCAs) saw a decrease of $321 million, dropping to $441.56 billion. Conversely, gold reserves experienced an increment of $221 million, touching $32.901 billion. There was also a reduction of $6 million in the special drawing rights with the International Monetary Fund (IMF), settling at $1.42 billion. The country’s reserve position with the IMF also decreased by $8 million to $3.57 billion.
In early March 2020, the reserve had reached a peak of $487.23 billion, which was its highest so far. During the fiscal year 2019-20, there was a substantial increase of almost $62 billion in the country’s foreign exchange reserves.
Understanding Foreign Exchange Reserves
Foreign exchange reserves are assets that are held on reserve by a central bank in foreign currencies. These assets can range from bonds, treasury bills to other government securities. Primarily, these assets are maintained as a backup fund by the central bank to safeguard against potential devaluation or possible insolvency of the national currency. Majority of the forex reserves are held in U.S. dollars.
India’s Forex reserves encompass: foreign currency assets, gold reserves, special drawing rights, and reserve position with the International Monetary Fund (IMF).
Details on Foreign Currency Assets (FCA)
FCAs are considerable components of the forex reserve and are assets valued in a foreign currency. This value is usually stated in dollar terms. FCAs consider the effects of appreciation or depreciation of non-US units like the euro, pound and yen that form part of the foreign exchange reserves.
Specifying Special Drawing Rights (SDR)
The SDR, an international reserve asset created by the IMF in 1969, was designed to supplement the official reserves of its member countries. The SDR is neither a currency nor a claim on the IMF. It acts as a potential claim on the freely usable currencies of IMF members and can be exchanged for these currencies.
The value of the SDR is derived from a weighted basket of major currencies including: the U.S. dollar, the euro, Japanese yen, Chinese yuan, and British pound. The interest paid to members on their SDR holdings is known as the SDR interest rate (or SDRi).
Reserve Position in the International Monetary Fund
A reserve tranche position represents a portion of the required quota of currency each member country must provide to the IMF. These funds can be drawn upon by the member country for its own purposes, without any conditions or service fees. It essentially serves as an emergency account available for use at any moment by IMF members.
The recent changes in India’s Forex reserves and its different components highlight the fluidity and complexities of managing a nation’s economic resources.
