FOREX RESERVE (Syllabus: GS Paper 3 – Economy)

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 SDRs:  International 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.