India's forex reserves decline by $678 million to $634.28 billion
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- Indian Foreign Exchange (Forex) reserves fell by USD 678 million for the week ending January 21, 2022, according to statistics from the Reserve Bank of India (RBI). India's total Foreign Exchange (Forex) reserves now total USD 634.287 billion.
- The decline in the Foreign Currency Assets (FCA), which is a critical component of the overall reserves, was the cause of the decline in the reserves. During the reporting week, FCA decreased by USD 1.155 billion, bringing the total to USD 569.582 billion.
- During the week under review, gold reserves increased by USD 567 million, bringing them to USD 40.337 billion.
- A USD 68 million decrease in Special Drawing Rights (SDRs) with the International Monetary Fund (IMF) brought the total to USD 19.152 billion.
Definition
Regarded as the health meter of a country, Foreign Exchange reserves or Forex reserves are assets such as foreign currencies, gold reserves, treasury bills, etc retained by a central bank or other monetary authority that checks the balance payments and influences the foreign exchange rate of its currency and maintains stability in financial markets. RBI is the custodian of the Foreign exchange reserves in India.
Forex reserves are external assets in the form of gold, SDRs (special drawing rights of the IMF) and foreign currency assets (capital inflows to the capital markets, FDI and external commercial borrowings) accumulated by India and controlled by the RBI.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 also limits external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.
The biggest contributor to this reserve is foreign currency assets followed by the gold, SDR, and reserve with the International Monetary Fund.
Purpose of the Foreign Exchange Reserve
1. The most significant objective behind this is to ensure that RBI has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
2. If the value of the Rupee decreases due to an increase in demand of the foreign currency then RBI sells the dollar in the Indian money market so that depreciation of the Indian currency can be checked.
3. A country with a good stock of forex has a good image at the international level because the trading countries can be sure about their payments.
4. A good forex reserve helps in attracting foreign trade and earns a good reputation in trading partners.
Foreign Currency Assets
- FCAs are assets that are valued based on a currency other than the country's own currency.
- FCA is the largest component of the forex reserve. It is expressed in dollar terms.
- The FCAs include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
Special Drawing Rights
- The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
- The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
- The value of the SDR is calculated from a weighted basket of major currencies, including the US dollar, the euro, Japanese yen, Chinese yuan, and British pound.
- The interest rate on SDRs or (SDRi) is the interest paid to members on their SDR holdings.
Reserve Position in the International Monetary Fund
- A reserve tranche position implies a portion of the required quota of currency each member country must provide to the IMF that can be utilized for its own purposes.
- The reserve tranche is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee.
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