FOREX RESERVES (Syllabus: GS Paper 3 – Economy)

Context: India's forex reserves recently dropped by USD 2.282 billion to USD 640.334 billion, marking the second consecutive week of decline, according to the Reserve Bank of India (RBI).

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. 
• Objective:

o Forex reserves act as a buffer against adverse currency fluctuations. 

o Assures creditors of the ability to meet external debt obligations.

o Acts as a financial safety net during economic crises or external shocks.

o Provides liquidity to address balance of payments deficits and currency crises.

o Supports seamless cross-border transactions and maintains the efficiency of the global payments system.

• Monetary Policy Implementation: Influences domestic liquidity, interest rates, and inflation levels for macroeconomic stability.
• The four components of forex reserves: Foreign currency assets, gold, special drawing rights and the reserve position in the International Monetary Fund.