News:India’s foreign exchange reserves have crossed the $450-billion mark for the first time.
Why has the reserves increased?
- The foreign exchange reserves have increased due to strong inflows which enabled the Reserve Bank of India(RBI) to buy dollars from the market.
About Foreign exchange reserves:
- Foreign exchange reserves are the foreign currencies held by a country’s central bank.They are also called foreign currency reserves or foreign reserve.
Purpose of Foreign exchange reserves:
- The foreign exchange reserves are held to back liabilities and influence monetary policy.
- They are also held to ensure that a central government agency has backup funds if their national currency rapidly devalues or becomes altogether insolvent.
- The critical function of the reserves is also to maintain liquidity in case of an economic crisis.
- The reserves are always needed to make sure a country will meet its external obligations.These include international payment obligations, including sovereign and commercial debts.
- They are also held to assure foreign investors that it’s ready to take action to protect their investments.
Components of Foreign exchange reserves:The Foreign exchange reserves of India consists of four categories which are
- Foreign Currency Assets:This is the largest component of the Forex Reserves consisting of US dollar and other major non-US global currencies.
- Gold:Gold reserves is the gold held by the Reserve Bank of India with the intention to serve as a guarantee to redeem promises to pay depositors, note holders or trading peers or to secure a currency.
- Special Drawing Rights(SDRs):The Special drawing rights(SDR) is an international reserve asset created by the IMF in 1969 to supplement its member countries official reserves.The SDR is neither a currency nor a claim on the IMF.
- The SDR basket Includes five currencies namely the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound sterling.
- Reserve Tranche Position:A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund(IMF) that can be withdrawn at any time without any interest during critical situations of a country.