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FOREIGN EXCHANGE RESERVE

  • March 14, 2021
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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FOREIGN EXCHANGE RESERVE

Subject: Economics

Context: The country’s foreign exchange reserves declined by $4.255 billion to $580.299 billion in the week ended March 5, according to RBI data.

Concept:

  • Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
  • It needs to be noted that most foreign exchange reserves are held in U.S. dollars.
  • These assets serve many purposes but are most significantly held to ensure that the central bank has backup funds if the national currency rapidly devalues or becomes altogether insolvent.
  • India’s Forex Reserves include:

Foreign Currency Assets

Gold

Special Drawing Rights

Reserve position with the International Monetary Fund (IMF)

Foreign Currency Assets

  • FCA are assets that are valued based on a currency other than the country’s own currency.
  • FCA is the largest component of the forex reserve. It is expressed in dollar terms.
  • FCA includes the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
  • Currency appreciation refers to the increase in value of one currency relative to another in the forex markets.
  • Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
  • In a floating exchange rate system, market forces (based on demand and supply of a currency) determine the value of a currency.

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 U.S. 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 International Monetary Fund (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.
economics FOREIGN EXCHANGE RESERVE

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