Forex

Forex

Subject :Economy

Context: 

Country’s forex reserves are piling up due inflows through both FDI and FPI route.

Details:

• Due to the aggressive monetary policy tightening in the US– the US dollar strengthened and the INR depreciated leading to a sharp fall in India’s forex .
• India’s foreign exchange reserves rose $11.02 billion to cover around nine months of projected imports for 2022-23.

Concept:

• Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.
• Components of India’s forex:
  • 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
  • Special Drawing Rights
    • The SDR is an international reserve asset, created by the 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 US dollar, the euro, Japanese yen, Chinese yuan, and British pound.
  • Reserve position with the International Monetary Fund (IMF).
    • 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.

Depreciation Phenomenon of Rupee vs. Dollar

• When the value of Indian Rupee (INR) against another currency says US Dollar (USD) decreases in the foreign exchange (forex) market, it is called as depreciation of Rupee (appreciation of dollar)  and on the contrary if the value of INR increases against USD, it is called as appreciation of Rupee (depreciation of dollar).
• When the demand of foreign exchange USD exceeds the supply, it will result in the increase in the price of USD in terms of rupee. In other words, the value of rupee will decrease against USD and it is called depreciation of Rupee.
• For example, in a forex market, if USD 1 can be purchased with INR 67 but after some time later its price is increased to INR 68, then Rupee is said to be depreciated by one Rupee. Again, after some time if the USD price decreases to INR 67, then Rupee is appreciated by one Rupee.