Why Indian forex reserve rising?

  • June 11, 2020
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Subject: Economy

Context:

India’s foreign exchange reserves hit an all-time high of $493.48 billion for the week ended May 29, according to the RBI data

Concept:

  • The Forex Reserves (‘foreign exchange reserves’) of an economy is its ‘foreign currency assets’ added with its gold reserves, SDRs (Special Drawing Rights) and Reserve Tranche in the IMF.

  • The RBI Act, 1934 provides the overarching legal framework for deployment of reserves in different foreign currency assets and gold.
  • Of total foreign currency assets in forex, 64 per cent is held in the securities like Treasury bills of foreign countries, 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad, according to the RBI data.
  • India also held 653.01 tonnes of gold as of March 2020, which are held overseas in safe custody with the Bank of England and the Bank for International Settlements as well as in domestic

Need for forex:

  • The International Monetary Fund says official foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency. It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.

Reason for spike

  • Rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs).
  • Foreign investors had acquired stakes in several Indian companies in the last two months. After pulling out Rs 60,000 crore each from debt and equity segments in March, Foreign Portfolio Investments (FPIs), who expect a turnaround in the economy later this financial year, have now returned to the Indian markets and bought stocks worth over $2.75 billion in the first week of June.
  • Fall in crude oil prices has brought down the oil import bill, saving the precious foreign exchange.
  • Overseas remittances and foreign travels have fallen steeply.
economy Why Indian forex reserve rising