The Reserve Bank of India (RBI) recently reported that India’s Foreign Exchange (Forex) reserves have surpassed the $450 billion benchmark for the first time in history. Propelled by robust investment inflows, RBI has been able to purchase dollars from the market, boosting the Forex reserves to $451.7 billion as of December 3, 2019. This marks an increase of $38.8 billion since the end of March 2019. So, let’s delve into what this implies for the Indian economy and understand more about Forex reserves.
The Influence on the Economy
Having a healthy Forex reserve provides the central bank with the leverage to intervene against any sharp depreciation in the value of the rupee. With the reserves at $451.7 billion, India’s import cover now extends to over 11 months. This means that the country has sufficient foreign exchange to fund its imports for nearly a year. This is a significant leap from September 2013, when the Forex reserves slipped to a worrying $274.8 billion. In response, the Centre and RBI initiated several measures to attract inflows. Over the past six years, the reserves have witnessed a steady upswing, adding a whopping $175 billion to its coffers.
Understanding Foreign Exchange Reserves
Foreign exchange reserves refer to the foreign currency assets held on reserve by a central bank. These assets, which can comprise bonds, treasury bills, and other forms of government securities, are predominantly held in U.S. dollars. The primary purpose of maintaining these reserves is to serve as a safety net in case the national currency undergoes rapid devaluation or, in extreme scenarios, becomes entirely insolvent.
Components of India’s Forex Reserve
India’s Forex reserves consist of various components including Foreign Currency Assets (such as the dollar), Gold, Special Drawing Rights (SDR), and a Reserve Position in the International Monetary Fund (IMF).
Special Drawing Rights
Special drawing rights are artificial currency instruments developed by the IMF for internal accounting. The value of SDR is derived from a basket of leading currencies – the U.S. dollar, euro, Japanese yen, Chinese yuan, and British pound. The SDR interest rate provides the basis for determining the interest paid to member countries when they lend to the IMF and the interest charged to members borrowing from the IMF.
Reserve Position in the International Monetary Fund
The reserve tranche position indicates a portion of the required quota of currency each country needs to provide to the IMF. This portion can be used by the member country for its own benefit anytime, without any prerequisite conditions or service fee. Think of it as an emergency account that IMF members can access anytime without obligations.
| Date | Forex Reserve Value (Billion USD) |
|---|---|
| Sept 2013 | 274.8 |
| End-March 2019 | 412.9 |
| Dec 3, 2019 | 451.7 |
The Importance of Robust Forex Reserves
Strong Forex reserves serve as a buffer during volatile economic circumstances. They safeguard the economy against unforeseen global financial shocks and allow the government to manage exchange rates effectively. It also instills confidence among investors, leading to increased foreign investments. This robustness in Forex reserves reflects the economy’s resilience and provides an opportunity for the central bank to manage the country’s external and fiscal liabilities efficiently.
