According to the newest data from the Reserve Bank of India (RBI), India’s foreign exchange (forex) reserves have reached a historic peak. As of the week ending on 16th October 2020, the reserves had surged by USD 3.615 billion to stand at an all-time high of USD 555.12 billion.
What Triggered the Increase
This significant rise in total reserves can primarily be attributed to a substantial surge in Foreign Currency Assets (FCAs), a major component of overall reserves. The data shows that FCAs jumped by USD 3.539 billion to reach a total of USD 512.322 billion.
Understanding Foreign Exchange Reserves
Foreign exchange reserves are assets held by a central bank in foreign currencies. These can include various government securities such as bonds and treasury bills. A significant portion of these reserves is typically retained in U.S. dollars. One of the primary reasons for holding these assets is to ensure that the central bank has a financial safety net if the national currency rapidly loses value or becomes completely insolvent.
Components of India’s Forex Reserves
India’s foreign exchange reserves are comprised of several key components:
– Foreign Currency Assets
– Gold
– Special Drawing Rights
– Reserve position with the International Monetary Fund (IMF)
Diving Deeper into Foreign Currency Assets (FCA)
FCAs are assets that are denominated in a currency other than the country’s own currency. Being the largest component of the forex reserve, it’s marked in dollar terms. FCAs also take into account the appreciation or depreciation of non-U.S. units like the euro, pound, and yen, held in the foreign exchange reserves.
The terms ‘appreciation’ and ‘depreciation’ refer to the fluctuation of one currency’s value relative to another in the forex markets. While currency appreciation signifies an increase in value, currency depreciation denotes a decline.
What are Special Drawing Rights (SDR)?
SDR is an international reserve asset created by the International Monetary Fund (IMF) in 1969 to supplement its member countries’ official reserves. However, SDR is not a currency or a claim on the IMF. It’s essentially a potential claim on the freely usable currencies of IMF members and can be exchanged for these currencies. The value of SDR is derived from a weighted basket of major currencies which include the U.S. dollar, the euro, Japanese yen, Chinese yuan, and British pound.
Reserve Position in the International Monetary Fund
A reserve tranche position refers to a part of the required quota of currency that each member country has to provide to the International Monetary Fund (IMF). This portion can be used by the country for its own needs. As an emergency account, the reserve tranche can be accessed by IMF members at any time without meeting certain conditions or paying a service fee.