• India’s foreign-exchange reserves are at a record and approaching the $500 billion mark,
• India’s foreign exchange reserves crossed the half-a-trillion mark for the first time after it surged by a massive USD 8.22 billion in the week ended June 5, as per the latest data from the RBI.
• The gold reserves declined by USD 329 million to USD 32.352 billion in the reporting week.
• The country’s reserve position with the IMF also rose USD 120 million to USD 4.28 billion during the reporting week.
What are forex reserves?
• Forex reserves are external assets in the form of 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.
• These foreign exchange reserves are held in support of a range of objectives like supporting and maintaining confidence in the policies for monetary and exchange rate management including the capacity to intervene in support of the national or union currency.
• It will also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis or when access to borrowing is curtailed.
What does the RBI do with the forex reserves?
• The RBI functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with the government.
• The RBI allocates the dollars for specific purposes. For example, under the Liberalised Remittances Scheme, individuals are allowed to remit up to $250,000 every year. The RBI uses its forex bank for the orderly movement of the rupee. It sells the dollar when the rupee weakens and buys the dollar when the rupee strengthens.
• When the RBI mops up dollars, it releases an equal amount in rupees. This excess liquidity is sterilised through issue of bonds and securities and LAF operations.
Where are India’s forex reserves kept?
• The RBI Act, 1934 provides the complete legal framework for deployment of reserves in different foreign currency assets and gold within the broad parameters of currencies, instruments, issuers and counterparties.
• As much as 64 per cent of the foreign currency reserves are held in securities like Treasury bills of foreign countries, mainly the US, 28 per cent is deposited in foreign central banks and 7.4 per cent is also deposited in commercial banks abroad.
• India also held 653.01 tons of gold as of March 2020, with 360.71 tons being held overseas in safe custody with the Bank of England and the Bank for International Settlements, while the remaining gold is held domestically.
Why are forex reserves rising despite the slowdown in the economy?
• The major reason for the rise in forex reserves is the rise in investment in foreign portfolio investors in Indian stocks and foreign direct investments (FDIs). Foreign investors had acquired stakes in several Indian companies in the last two months.
• On the other hand, the fall in crude oil prices has brought down the oil import bill, saving precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen steeply – down 61 per cent in April from $12.87 billion.
• Finance minister, Nirmala Sitharaman’s announcement to cut corporate tax rates on September 20 has caused a sharp jump by $73 Billion in reserves over the last nine months.