FOREX

Eight months after hitting a record high of $642.45 billion in September 2021, India’s foreign exchange reserves have now fallen below the $600 billion mark amid capital outflows and strengthening dollar.

Details –

• Foreign exchange reserves declined by $ 2.69 billion to $ 597.72 billion during the week ended April 29.
• With this fall, forex reserves have declined $ 44.73 billion from $ 642.45 billion recorded on September 3, 2021, according to Reserve Bank of India (RBI) data.

What are forex reserves?

• Forex reserves are external assets in the form gold, SDRs (special drawing rights of the IMF) and foreign currency assets (capital inflows to the capital markets, FDI and external commercial borrowings) accumulated by India and controlled by the Reserve Bank of India.
• Components: India’s foreign exchange reserves comprise –
  • • Foreign currency assets (FCAs) – These are maintained in currencies like US dollar, euro, pound sterling, Australian dollar and Japanese yen.
    • Gold
    • SDR (special drawing rights) in IMF – This is the reserve CURRENCY with IMF
    • RTP (reserve tranche position) in IMF – This is the reserve CAPITAL with IMF

Reason of decline –

• The decline was on account of a fall in foreign currency assets (FCAs), a major component of the overall reserves. The foreign currency assets also include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the reserves.
• A major reason for the decline in forex reserves is capital outflows by foreign portfolio investors (FPIs) who pulled out $ 21.43 billion since September 2021 as the US Federal Reserve started monetary policy tightening and interest rate hikes.

How a rise in forex reserves helps India?

• The rising forex reserves give a lot of comfort to the government and the Reserve Bank of India in managing India’s external and internal financial issues at a time when the economic growth is set to contract due to a second pandemic wave.
• It is a big cushion in the event of any crisis on the economic front and enough to cover the import bill of the country for a year.
• The rising reserves have also helped the rupee to strengthen against the dollar.
• Reserves will provide a level of confidence to markets that a country can meet its external obligations, demonstrate the backing of domestic currency by external assets, assist the government in meeting its foreign exchange needs and external debt obligations and maintain a reserve for national disasters or emergencies.