India’s Forex Reserve 

#GS3 #Economy 

India’s foreign exchange (forex) reserves surged by $3.883 billion to touch a lifetime high of $541.431 billion in the week ended August 28, Reserve Bank of India (RBI) data showed on Friday (September 4).  

  • India’s forex reserves had crossed $500 billion for the first time ever in the week ended June 5, 2020, hitting what was then the all-time high of $501.7 billion. 

Foreign Exchange Reserves 

  • These are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities. 
  • Most foreign exchange reserves are held in U.S. dollars. 
  • These assets are held to ensure that the central bank has backup funds if the national currency rapidly devalues or becomes altogether insolvent. 
  • It is an important component of the Balance of Payment and an essential element in the analysis of an economy’s external position. 

Forex reserves includes  

  • Foreign Currency Assets(FCA)  
  • Gold reserves 
  • Special Drawing Rights 
  • Reserve position with the International Monetary Fund (IMF) 

FCAs:  

  • Assets that are valued based on a currency other than the country’s own currency.  
  • It is the largest component of the forex reserve.  
  • It is expressed in dollar terms. 

Special drawing rights (SDR) 

  • It is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. 
  • It is neither a currency nor a claim on the IMF.  
  • The value of the SDR is calculated from a weighted basket of major currencies, including the U.S. Dollar, the Euro, Japanese Yen, Chinese Yuan, and British Pound. 

Reserve position with the International Monetary Fund (IMF) 

  • It implies a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes. 
  • It is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee. 
  • India’s FOREX is governed by RBI under RBI Act,1934.  
  • The level of foreign exchange reserves is largely the outcome of the RBI’s intervention in the foreign exchange market. 
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