India’s Foreign Exchange (Forex) Reserves have seen an impressive surge, according to recent data from the Reserve Bank of India. Notably, the reserves increased by $5 billion to $609 billion in just one week, ending on the 25th June, 2021. The rise in the Foreign Currency Assets (FCA) is considered as the main component of this overall increase.
Breakdown of Changes in Reserve Holdings
The most significant change observed in forex reserve holdings was in the FCA, which rose by a considerable $4.7 billion to total $566 billion. Simultaneously, gold reserves also saw an increase, rising by $365 million to reach a new total of $36.296 billion. While the special drawing rights (SDRs) with the International Monetary Fund (IMF) remained stable at $1.498 billion, the country’s reserve position with the IMF saw a slight increase of $1 million, culminating in a new total of $4.965 billion for the week.
Understanding Forex Reserves
Foreign exchange reserves are essentially assets held on reserve by a central bank in foreign currencies. These might include bonds, treasury bills and other government securities. Interestingly, most foreign exchange reserves are held in US dollars. India’s Forex Reserve, specifically, includes Foreign Currency Assets, gold reserves, Special Drawing Rights and the reserve position with the International Monetary Fund (IMF).
The Purpose of Holding Forex Reserves
Forex reserves play multiple vital roles, such as supporting and maintaining confidence in monetary and exchange rate management policies. They also provide capacity to intervene in support of the national or union currency. Importantly, they limit external vulnerability by maintaining foreign currency liquidity, which can absorb shocks during times of crisis or when borrowing access is limited.
Significance of Increasing Forex Reserves
Rising forex reserves serve several critical functions, including providing a comfortable position for the government and the RBI in managing India’s external and internal financial issues. They act as a cushion during any Balance of Payment (BoP) crises on the economic front, and encourage rupee appreciation against the dollar. Beyond this, reserves foster confidence in markets and investors that a country can meet its external obligations.
About Foreign Currency Assets
Foreign Currency Assets (FCAs) are assets valued in a currency other than the country’s own currency. Representing the largest component of the forex reserve, FCAs are expressed in dollar terms and include the effects of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
The Nature of Special Drawing Rights
The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Neither a currency nor a claim on the IMF itself, the SDR is a potential claim on the freely usable currencies of IMF members. Based on a weighted basket of major currencies (US dollar, euro, Japanese yen, Chinese yuan, and British pound), its value can be calculated and exchanged for these currencies.
India’s Position in the International Monetary Fund
A reserve tranche position with the IMF 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. Essentially, it is an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee. Currently, India’s position in the IMF has risen marginally to $ 4.965 billion.
