Foreign Exchange Reserve

Foreign exchange reserves: Foreign exchange reserves are assets held on reserve by a central bank of a country.

In context of India, Foreign Exchange Reserves include:

Forex Reserves Storage: The RBI Act,1934 provides a legal framework for deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments and issuers.

FCAs constitute the largest component of the Forex Reserves. FCAs consist of US dollar and other major non-US global currencies. It also comprises of investments in US Treasury bonds, bonds of other selected governments, deposits with foreign central and commercial banks.

Movement in FCA occur mainly on account of purchase and sale of foreign exchange by RBI, income arising out of deployment of Forex reserves, external aid receipts of government and revaluation of assets.

SDR is an international reserve asset created by IMF and allocated to its members in proportion of their quota at IMF.

The gold reserves stand at ~$40.3 billion.

SDRs’ stands at ~$19.15 billion.

RBI’s reserve position with the IMF stands at ~$3.6 billion

FCA > Gold >  SDR > RBI reserve with IMF

Comfortable Position to Government: The rising forex reserves give comfort to the government and the RBI in managing India’s external and internal financial issues at a time of major contraction in economic growth.

Managing BoP Crisis: It serves as a cushion in the event of a Balance of Payment (BoP) crisis on the economic front. It is enough to cover the import bill of the country for a year.

External Debt Obligations: Assist the government in meeting its foreign exchange needs and external debt obligations.

Strengthening of Rupee: The rising reserves have helped the rupee to strengthen against the dollar. The foreign exchange reserves to GDP ratio is around 15 per cent.

Confidence in Market: Reserves will provide a level of confidence to markets and investors that a country can meet its external obligations.