Decline in Forex reserves

Decline in Forex reserves

Subject: ECONOMY

Context: According to RBI data, country’s Forex reserves decreased amid a fall in currency and gold assets. FCA, an essential component of the forex reserves decreased by $881 mn to $577 bn.

Concept:

HOW FALL IN FOREIGN RESERVES IMPACT?

• Higher reserves are a big cushion in the event of any economic crisis and help to cover the import bill of the country for a year, demonstrate the backing of domestic currency by external assets and maintain a reserve for national disasters or emergencies.
• Falling reserves worry Govt and RBI in managing the nation’s external and internal financial issues.

India’s Forex Reserve include:

• Foreign Currency Assets
• Gold reserves
• Special Drawing Rights
• Reserve position with the IMF

Foreign Currency Assets:

• are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
• Expressed in dollar terms, the FCA includes the effect of appreciation or depreciation of non- US units like the Euro, Sterling and Yen held in the forex reserves.
• RBI is the custodian and manager of forex reserves.

Gold Reserves:

• Gold occupies a special position in the foreign reserves of central banks as it is widely stated to beheld for reasons of diversification.
• Moreover, the unique property of gold is believed to be its ability to enhance the credibility of the central bank when it holds adequately, and this has been proved time and again.

Special Drawing Rights:

• • The SDR is an international reserve asset, created by the International Monetary Fund (IMF) in 1969 to supplement its member countries’ official reserves.
  • The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
  • The value of the SDR is calculated from a weighted basket of major currencies, including the US dollar, the euro, Japanese yen, Chinese yuan, and British pound.
  • The interest rate on SDRs or (SDRi) is the interest paid to members on their SDR holdings.

Reserve Position in the International Monetary Fund:

• • A reserve tranche position 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.
  • The reserve tranche is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee.