The Forex Reserves
- March 19, 2022
- Posted by: admin1
- Category: DPN Topics
The Forex Reserves
Section: External sector
India’s forex reserves witnessed the single steepest weekly fall so far (by $9.646 billion). The forex reserves stood at $622.275 billion as at March 11, 2022.
- The decline in foreign currency assets (FCA) including multi-currency assets (securities, deposits with other central banks and the BIS, and deposits with commercial banks overseas).
- Other two components of the reserves too declined — Special and Reserve Position in the IMF ($7 million)
- The only component of the forex reserves that increased was gold.
- RBI intervention to stabilize rupee depreciation-
- State-run banks sold dollars (USD) on behalf of the Reserve Bank of India (RBI) to keep the rupee from breaching the 77 a dollar as crude oil prices surged beyond $120 a barrel.
- Capital outflows from the Indian equity market.
- Global financial markets volatility in the backdrop of the Russia Ukraine war.
|RBI exchange rate management|
In March 1992, the Liberalised Exchange Rate Management System (LERMS) involving the dual exchange rate was instituted. A unified single market-determined exchange rate system based on the demand for and supply of foreign exchange replaced the LERMS effective March 1, 1993.
The Reserve Bank’s exchange rate policy focuses on ensuring orderly conditions in the foreign exchange market. For this purpose, it closely monitors the developments in the financial markets at home and abroad. When necessary, it intervenes in the market by buying or selling foreign currencies. The market operations are undertaken either directly or through public sector banks.
In addition to the traditional instruments like forward and swap contracts, the Reserve Bank has facilitated increased availability of derivative instruments in the foreign exchange market. It has allowed trading in Rupee-foreign currency swaps, foreign currency-Rupee options, cross-currency options, interest rate swaps and currency swaps, forward rate agreements and currency futures
RBI forex management
The Reserve Bank of India, is the custodian of the country’s foreign exchange reserves and is vested with the responsibility of managing their investment. The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.
The Reserve Bank’s reserves management function has in recent years grown both in terms of importance and sophistication for two main reasons. First, the share of foreign currency assets in the balance sheet of the Reserve Bank has substantially increased. Second, with the increased volatility in exchange and interest rates in the global market, the task of preserving the value of reserves and obtaining a reasonable return on them has become challenging.
The basic parameters of the Reserve Bank’s policies for foreign exchange reserves management are safety, liquidity and returns. The Reserve Bank of India Act permits the Reserve Bank to invest the reserves in the following types of instruments:
1) Deposits with Bank for International Settlements and other central banks
2) Deposits with foreign commercial banks
3) Debt instruments representing sovereign or sovereign-guaranteed liability of not more than 10 years of residual maturity
4) Other instruments and institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act
5) Certain types of derivatives
While safety and liquidity continue to be the twin-pillars of reserves management, return optimisation has become an embedded strategy within this framework. The Reserve Bank has framed policy guidelines stipulating stringent eligibility criteria for issuers, counterparties, and investments to be made with them to enhance the safety and liquidity of reserves. The Reserve Bank, in consultation with the Government, continuously reviews the reserves management strategies.
- The level of reserves has risen from 16 percent of GDP at end-March 2013 to the current 20.5 per cent.
- The import cover provided by the reserves has doubled
- Short-term external debt on a residual maturity basis has declined over the same period from 59 percent of reserves to 40.3 per cent.
- India currently has the fifth largest holdings of international reserves in the world.
- India’s international assets cover three-fourth of India’s external liabilities, including debt, equity and all other forms of contractual obligations.
|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.
India’s Forex Reserve include:
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.
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.
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.