India’s Forex reserves rise to a record high of $426.42 billion

As per the data revealed by Reserve Bank of India (RBI), India’s foreign exchange (Forex) reserve rose to a life-time high of $426.42 billion (in week to 21 June 2019) after it surged by $4.215 billion boosted by higher foreign portfolio investments (FPI) and a stable rupee.

Key Highlights

Background: Earlier, the Forex reserves had scaled a record high of $426.028 billion in week to 13 April 2018. Since then it had been fluctuating and had even fallen by more than $35 billion, as monetary authority had been heavily intervening in market to salvage Indian rupee, which was worst performing currency in Asia throughout 2018.In previous reporting week (prior to June 21), reserves had declined by $ 1.358 billion to $422.2 billion.

India’s reserve position with International Monetary Fund (IMF) also rose by $9.6 million to $3.354 billion.

Reason: This rise in reserves was on account of increase in foreign currency asset, which is a major component of overall foreign exchange reserves of the country.

Foreign Currency Assets: expressed in terms of dollars includes effect of appreciation or depreciation of non-US units such as British pound, the Japanese yen and euro held in forex reserves. In reporting week of 21 June, foreign currency assets increased by $4.202 billion to $398.649 billion.

Gold Reserves: remained unchanged at $22.958 billion.

Special Drawing Rights (SDR): with IMF increased by $4.2 million to $1.453 billion. India’s reserve position with the fund also rose by $9.6 million to $3.354 billion..

Significance: According to market experts, with $427 billion, reserves can take care of imports for almost 10 months.

About Foreign Reserves

It is the reserve assets held by a central bank of country in foreign currencies which can act as a buffer and can help economy in challenging times. It can also be used to back liabilities on their own issued currency and to influence monetary policy of the country. Almost all countries across the world, regardless of size of their economy, hold significant forex reserves.

Importance: Forex reserves are one of the key revenue earning sources for a country central bank, which invests money in foreign government bonds and also with IMF and other secure investment class.

India’s FOREX Reserves includes components:

1. Foreign currency assets (FCAs)- It constitutes largest component of Indian Forex Reserves and are expressed in US dollar terms.
2. Gold Reserves
3. Special Drawing Rights (SDRs)
4. Reserve Tranche Position (RTP) of RBI with International Monetary Fund (IMF).

Higher forex reserves are must for a fast-growing economy such as India with higher imports and lower export earnings.

Month: Current Affairs - June, 2019