Foreign Exchange Reserve

In the sharpest jump in over two years, the country’s foreign exchange reserves increased by $15.267 billion to $653.966 billion recently.

• The sharp rise during the week under review is being attributed to the $10 billion forex swap undertaken by the RBI recently, when it bought dollars against rupee to inject liquidity in the system
• The forex reserves had increased to an all-time high of $704.885 billion at end-September 2024.

What are Foreign Exchange Reserves?

• Foreign currency assets held by the central banks of countries
• Components: India’s Forex Reserve include: 
• • Foreign Currency Assets (FCA) → Composed of major global currencies like US Dollar, Euro, & Japanese Yen. 
  • Gold Reserves → Long been valued as a key reserve asset offering both stability and universal acceptance.
  • Special Drawing Rights (SDRs) → Created by the International Monetary Fund (IMF) → Reserve assets that supplement member countries’ official reserves. 
  • Reserve position with IMF → Portion of required quota of currency each member country must provide to IMF
• Weightage → Foreign Currency Assets (FCA) (More than 85%) > Gold Reserves (More than 10%) > SDRs > Reserve Tranche Position (RTP)

• China is the largest foreign exchange reserve holder in the world.
• RBI is Custodian of the foreign exchange reserves in India.

What is the Role of Forex Reserves in Economic Stability? 

Liquidity Management

• Ensures the country has enough liquidity for foreign exchange transactions.
• Helps cope with balance of payments deficits.

Currency Stabilization

• RBI intervenes in Forex markets using reserves to influence the Rupee’s exchange rate.
• Example:
• • If the Rupee depreciates due to high demand for foreign currency → RBI sells US dollars in the market to stabilize the Rupee.
• Post 1990-91 economic crisis: C. Rangarajan and Y.V. Reddy committee recommended maintaining forex reserves to cover 12 months of imports.