Foreign exchange reserves

Subject: Economy

Context:

India’s foreign exchange reserves jumped by a record $11.9 billion in the week ending July 31 to hit a fresh high of $534.5 billion, making it the fifth largest holder of reserves in the world.

Concept:

• The Forex Reserves (‘foreign exchange reserves’) of an economy is its ‘foreign currency assets’ added with its gold reserves, SDRs (Special Drawing Rights) and Reserve Tranche in the IMF.
• The RBI Act, 1934 provides the overarching legal framework for deployment of reserves in different foreign currency assets and gold.
• Of total foreign currency assets in forex, 64 per cent is held in the securities like Treasury bills of foreign countries, 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad, according to the RBI data.
• India also held 653.01 tonnes of gold as of March 2020, which are held overseas in safe custody with the Bank of England and the Bank for International Settlements as well as in domestic

Need for forex:

• The International Monetary Fund says official foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency. It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

Reason for rise

• FPI inflows
• Dip in crude oil prices
• Import savings
• FDI inflows
• Dip in gold imports