Forex Reserves

Forex Reserves

Subject – Economy

Context – Fall in currency assets, gold pulls forex reserves off record high.

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 US 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 Reserve include:
  • Foreign Currency Assets
  • Gold reserves
  • Special Drawing Rights
  • Reserve position with the IMF
• Foreign Currency Assets:
  • FCAs 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.
  • The FCAs include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange 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 1969to 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.