Forex Reserves

Forex Reserves

Subject: Economy

Context: With the rate of returns on the country’s foreign exchange reserves declining, the Reserve Bank of India (RBI) and the government are exploring ways to enhance returns and have sought external expert assistance for better deployment of forex.

Concept:

• The RBI’s Department of External Investments and Operations (DEIO) invests forex keeping in mind the objectives of safety, liquidity and return, in that order, as part of its management of foreign exchange reserves
• 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)

Reason for Decline

• US and the Euro zone, slashed interest rates, the rate of earnings on foreign currency assets declined to 2.10 per cent in 2020-21
• low yield environment makes it an arduous task for asset managers in general and reserve managers in particular, to generate reasonable returns
• the years have made investment in gilts of developed countries unattractive, even as there are limits of how much portion of reserves can be invested in gold
• RBI reduced its holdings in foreign securities by over $ 10 billion to $ 359.87 billion by March 2021 from September 2020