India’s rising forex reserves & its Importance

• India’s foreign exchange reserves are rising and are slated to hit the $500 billion mark soon. In the month of May, forex reserves jumped by $12.4 billion to an all-time high of $493.48 billion (around Rs 37.30 lakh crore).

About:

• Foreign-exchange reserves (also called forex reserves or FX reserves) are reserve assets held by a central bank in foreign currencies, used to back liabilities on their own issued currency as well as to influence monetary policy.

• India’s foreign exchange reserves comprise

• Foreign currency assets (FCAs) are maintained in currencies like US dollar, euro, pound sterling, Australian dollar and Japanese yen.

• Gold

• SDR (special drawing rights) in IMF: This is the reserve CURRENCY with IMF

• RTP (reserve tranche position) in IMF: This is the reserve CAPITAL with IMF

• Reserves are denominated and expressed in the US dollar, which is the international numeraire for the purpose.

• India’s FOREX is governed by RBI under RBI act,1934. The level of foreign exchange reserves is largely the outcome of the RBI’s intervention in the foreign exchange market.

Why are forex reserves rising despite the slowdown in the economy?

• The major reason is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments
(FDIs).

• On the other hand, the fall in crude oil prices has brought down the oil import bill, saving the precious foreign exchange.

Importance of Forex:

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• Reserves are held for maintaining liquidity and allowing time to absorb shocks in situations where access to borrowing is curtailed or are very costly.

• It provides confidence that the authorities are committed to the timely discharge of external obligations and to supporting the value of the local currency. It is an important component of the Balance of Payment and an essential element in the analysis of an economy’s external position.