India’s forex reserves exceeded $700 billion for the first time, reaching $704.89 billion, following a seven-week climb.
India’s Forex Reserves Surge by $87.6 Billion in 2024, Crossing $700 Billion Mark
India’s forex reserves have surged by $87.6 billion in 2024, surpassing last year’s total increase of nearly $62 billion.
- In the week ending September 27, the reserves increased by $12.6 billion, marking the largest weekly rise since mid-July 2023.
- India is now the fourth-largest economy globally to have forex reserves exceeding $700 billion, following China, Japan, and Switzerland.
Factors which led to rise in India’s Forex Reserves
- Investment Boost: Since 2013, India has strengthened its forex reserves through improved macroeconomic conditions, attracting foreign investments.
- Foreign Inflows: In 2024, foreign inflows have reached $30 billion, primarily driven by local debt investments included in a J.P. Morgan index. RBI Interventions: The recent increase was partly due to $4.8 billion in dollar purchases by the RBI and $7.8 billion from valuation gains linked to the U.S. Treasury yields, the dollar’s strength, and rising gold prices.
- Market Stability: Adequate forex reserves help reduce currency volatility, providing the Reserve Bank of India (RBI) with the capability to intervene if necessary.
- Controlled Volatility: The RBI has managed the rupee’s volatility, keeping it stable among emerging market currencies.
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About Foreign Exchange Reserves
- Foreign Exchange Reserve are assets denominated in a foreign currency that are held on reserve by a central bank.
- Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
- Composition of Forex of India (in descending order)
- Foreign Currency Assets
- Gold Reserves
- Special Drawing Rights (SDR)
- Reserve Position in IMF
Foreign Currency assets (FCA): Foreign Currency Assets (FCA) that is the most important component of the RBI’s foreign exchange reserve are the assets like US Treasury Bills bought by the RBI using foreign currencies.
- The FCA is the largest component of India’s forex reserve.
Special Drawing Rights (SDR):
- An international reserve asset, created by the IMF in 1969;
- It is neither a currency nor a claim on the IMF.
- Rather, it is a potential claim on the freely usable currencies of IMF members.
- Value of the SDR: It is based on a basket of five currencies: Dollar, Euro, Renminbi, Yen and Pound Sterling.
Reserve Tranche: A Reserve Tranche is a portion of the required quota of currency each member country must provide to the IMF.
- It can be utilized by the country for its own purposes without a service fee or economic reform conditions.
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Significance of foreign currency reserves
- Economic Crisis Liquidity: In crises, central banks can exchange foreign currency for local currency, ensuring companies remain competitive in imports and exports.
- Currency Depreciation: Japan, using a floating exchange rate, purchases US treasuries to keep the yen lower than the dollar, enhancing export competitiveness.
- International Finance Obligation: Forex reserves help meet international financial commitments, such as paying debts and financing imports.
- Internal Project Funding: Foreign currency reserves can be utilized to finance domestic infrastructure and industry projects.
- Reassurance to Investors: Holding forex reserves can instill confidence in foreign investors during times of unrest or uncertainty.
- Portfolio Diversification: Central banks diversify their reserves by holding various currencies and assets, mitigating risk from declining investments.
October 10, 2024
