Foreign Reserves

Subject: Economy

Context : India’s foreign exchange reserves jumped by $5.86 billion in the week ended October 9 to hit a fresh high of $551.5 billion according to RBI.

Concept :

Forex Reserves:

• Foreign exchange reserves are assets denominated in a foreign currency that are held on reserve by a central bank. These may include foreign currencies, bonds, treasury bills and other government securities.

Objectives Behind Holding Forex Reserves:

• Supporting and maintaining confidence in the policies for monetary and exchange rate management
• Provides the capacity to intervene in support of the national or union currency.
• Limits external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

Forex reserves are external assets accumulated by India and controlled by the RBI in the form of:

• Gold
• SDRs (special drawing rights of the International Monetary Fund – IMF)
• Foreign currency assets (capital inflows to the capital markets, Foreign Direct Investment and external commercial borrowings)
• Reserve Position with IMF

Forex Reserves Storage:

• The RBI Act, 1934 provides the legal framework for deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, and issuers.