Rise in India’s Forex Reserves 

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.