Recently Central Bank RBI reveal that India’s Foreign Exchange (Forex) reserves declined by $2.986 billion to reach $579.285 billion in the week ended 26th March 2021.

  • The gold reserve component of the Forex Reserve increased whereas the other components – Special Drawing Rights (SDR), the Foreign Currency Assets (FCA) and the Reserve Position witnessed decline.

Points To Note

  • The Foreign exchange reserves are assets held on reserve by a Reserve Bank of India 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.
  • Objectives Behind 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.
  • India’s Forex Reserve include:
    • Foreign Currency Assets (FCA)
    • Gold reserves
    • Special Drawing Rights (SDR)
    • Reserve position with IMF
  • Foreign Currency Assets
    • Foreign Currency Assets are assets that are valued based on a currency other than the country’s own currency.
    • It is the largest component of the forex reserveIt is expressed in dollar terms.
    • The Foreign Currency Assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.
  • Gold Reserves
    • Gold occupies a special position in the foreign reserves of RBI as it is widely stated to be held for reasons of diversification.
    • Moreover, the unique property of gold is believed to be its ability to enhance the credibility of the RBI when it holds adequately and this has been proved time and again.
    • Gold compares extremely favorably to other traditional reserve assets with high-quality and liquidity helping Central Banks to preserve capital, diversify portfolios, mitigate risks on the medium/long-term.
      • Gold has consistently outperformed the average returns of other alternative financial assets.
  • Special Drawing Rights
    • The Special Drawing Rightsis an international reserve asset, created by the International Monetary Fund (IMF) in the year 1969 to supplement its member countries’ official reserves.
    • The Special Drawing Rights is neither a currency nor a claim on the International Monetary Fund. 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.

India’s Foreign Exchange reserves declined