FOREX RESERVE (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     30th March 2024        
Samadhaan

Context: India's forex reserves have scaled to a historic pinnacle, reaching an impressive $642.463 billion as on March 2024, marking a significant milestone for the country's economic landscape.

INDIA'S FOREX RESERVES

  • Definition: These reserves are assets like foreign currencies, gold reserves, and treasury bills, among other things, maintained by a country’s central bank or other monetary authority.
  • Nodal body in India: Reserve Bank of India.
  • Legal status: RBI Act and the Foreign Exchange Management Act, 1999 govern the foreign exchange reserves. 
  • Components:  Four categories of foreign exchange reserves:

oForeign Currency Assets: Largest component, constituting more than 80% of the total portfolio.

üIndia heavily invests in US treasury bills, with about 75% of foreign currency assets in dollar-denominated securities.

üTreasury bills of foreign countries > Deposit in foreign central banks > Deposit in commercial banks abroad.

oGold Holdings: Represents physical gold reserves held by the central bank. 2nd largest component.

oSpecial Drawing Rights SDRsInternational reserve assets allocated by the International Monetary Fund (IMF).

üSupplemented to member countries' official reserves.

üThe SDR is not a currency, but its value is based on a basket of five currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

oReserve Tranche Position: Portion of a country's IMF quota available for immediate use without conditions.

üProvides liquidity support during financial crises or balance of payments deficits.

üSmallest component.

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