Significance of rising Forex Reserve

Subject: Economy

Context:

For the first time India’s forex reserves crossed $500 billion in the week ended June 5, 2020.

Concept:

Forex reserves are define as external assets in the form of gold, SDRs (special drawing rights of the IMF) and foreign currency assets held by India and controlled by the Reserve Bank of India.

Significance

• Rising forex reserves will give a lot of comfort to the government and the Reserve Bank of India in managing India’s external and internal financial issues at a time when the economic growth is set to contract by 1.5 per cent in 2020-21.
• It is a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year.
• The rising reserves have also helped the rupee to strengthen against the dollar.
• The foreign exchange reserves to GDP ratio is around 15 per cent.
• Reserves will provide a level of confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its foreign exchange needs and external debt obligations and maintain a reserve for national disasters or emergencies.