According to recent data from Reserve bank of india (RBI), India’s Foreign Exchange (Forex) reserves posted a decline of USD 678 million during the week ended 21st January 2022 to reach USD 634.287 billion.
- The slip in the reserves was on account of a drop in the Foreign Currency Assets (FCA), a vital component of the overall reserves. FCA declined by USD 1.155 billion to USD 569.582 billion in the reporting week.
- Gold reserves saw an increase of USD 567 million to USD 40.337 billion in the reported week.
- The Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) fell USD 68 million to USD 19.152 billion.
Foreign Exchange Reserves:
- 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
- Gold reserves
- Special Drawing Rights
- Reserve position with the International Monetary Fund (IMF).
- Objectives of Holding Forex Reserves:
- Supporting and maintaining confidence in the policies for monetary and exchange rate management.
- Provides the capacity to intervene in support of the national or union currency.
- Limits external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.
- Significance of Rising Forex Reserves:
- The rising forex reserves give comfort to the government and the RBI in managing India’s external and internal financial issues.
- It serves as a cushion in the event of a Balance of Payment (BoP) crisis on the economic front.
- The rising reserves have also helped the rupee to strengthen against the dollar.
- Reserves will provide a level of confidence to markets and investors that a country can meet its external obligations.