UPSC Articles
Rise in India’s Forex Reserves
Part of: GS-Prelims and GS-III – Economy
In News:
- India’s foreign exchange reserves are rising and will reach $500 billion mark soon.
- In the month of May, forex reserves jumped by $12.4 billion to an all-time high of $493.48 billion.
Key takeaways
- The major reason forex reserves are rising despite the slowdown in the economy is the rise in investment in foreign portfolio investors (FPIs) and foreign direct investments (FDIs).
- Besides, the fall in crude oil prices has brought down the oil import bill.
Important value additions
Foreign Exchange Reserves
- These are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
- Most foreign exchange reserves are held in U.S. dollars.
- These assets are held to ensure that the central bank has backup funds if the national currency rapidly devalues or becomes altogether insolvent.
- It is an important component of the Balance of Payment and an essential element in the analysis of an economy’s external position.
India’s Forex Reserve
- It includes
- Foreign Currency Assets(FCA)
- Gold reserves
- Special Drawing Rights
- Reserve position with the International Monetary Fund (IMF)
- FCAs:
- Assets that are valued based on a currency other than the country’s own currency.
- It is the largest component of the forex reserve.
- It is expressed in dollar terms.
- Special drawing rights (SDR)
- It is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
- It is neither a currency nor a claim on the IMF.
- The value of the SDR is calculated from a weighted basket of major currencies, including the U.S. Dollar, the Euro, Japanese Yen, Chinese Yuan, and British Pound.
- Reserve position with the International Monetary Fund (IMF)
- It implies a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes.
- It is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee.
- India’s FOREX is governed by RBI under RBI Act,1934.
- The level of foreign exchange reserves is largely the outcome of the RBI’s intervention in the foreign exchange market.
