With this, India has emerged as the fifth largest foreign exchange reserves holder in the world after China, Japan, Switzerland and Russia.
In 2020-21, India’s balance of payments recorded surplus in both current account and capital account which contributed to the increase in foreign exchange reserves during the year.
Besides exports and imports of goods and services, the overall stability of the external sector depends on other components of balance of payments including remittances (transfers), income in the current account, the size of net capital flows and external debt.
India is comfortable in most of these external sector vulnerability indicators.
What is 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 and Reserve position with the International Monetary Fund (IMF)
FCAs are 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.
